Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
equity on a particular date.
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
collection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
receivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
collection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
receivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
b. Investing Activities
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
after a specified period of time.
5
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Department of Business Management
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
3
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
dividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
5
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
collection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
receivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
b. Investing Activities
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
after a specified period of time.
5
57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
in more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
not paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
account terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
collateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
of the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
each year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
asset minus the accumulated depreciation on that asset.
7
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Department of Business Management
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
3
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
dividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
5
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
7
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
specifically involves working out an average cost per unit at each point in time after a
purchase.
8
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
equity on a particular date.
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
terms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
in more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
not paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
account terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
collateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
of the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
each year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
83 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
the first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
This method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
8
average cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
expenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
long time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
business.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
delivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
about the financial statements the report is attached to.
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Department of Business Management
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
3
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
dividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
5
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
7
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
specifically involves working out an average cost per unit at each point in time after a
purchase.
8
Weighted Average Method Here the average cost is applied i.e. after every purchase an
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
advantage due to that expenditure. It is usually incurred for accusation of an asset. These
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
or machinery Expenditure incurred in connection with the purchase of a fixed asset. For
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
Buy a car is capital expenditure because its benefit to the business will be spread over a
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
either by owner or shareholder of the business? or from sale of fixed assets of the
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
f. Deferred Revenues : Payments received in advance of services performed or goods being
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
year being reported on.
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
89. Audit Report: A report issued by an independent CPA that expresses some opinion
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90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
91. Dividend: A portion of the company's profits paid to common and/or preferred
92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
9 3 . Holding company: A corporation that holds a majority of the shares outstanding of a
94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
manager has had so much information about a debtor company's financial condition, plans,
operates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
publicly traded companies c [ ompanies selling stocks and/ or bonds] .
97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
98. Fair Market Value: The market value of an asset as determined by supply and demand
100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
statement, and cash?flow statement as well as notes to the financial statements and the
operations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
Financial statements that report the combined operating results of two or more legally
103. Interim financial statements: Financial statements for periods of less than one year.
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Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
recognized when they are incurred, regardless of when the expenses are paid.
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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39. Accounts receivable: Money due for services performed or goods delivered on open
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
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this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
in more than one year.
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
not paid by a corporation to its stockholders in the form of dividends.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
account terms and other resources.
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
collateral.
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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profits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
of the cost of the asset over the useful life of that asset.
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
b. Declining?balance: An accelerated method of depreciation, it results in higher
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
each year is calculated by determining how much it will cost to replace the asset, how many
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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83 . Accumulated Depreciation: The total depreciation recorded against an asset since its
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
a. The First1?In?First?Out Method(FIFO )
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
business.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
the first goods sold.
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
This method assumes that we sell all our inventories simultaneously.
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
So we work out an average cost for all chemicals that we have in our possession. The method
purchase.
8
Weighted Average Method Here the average cost is applied i.e. after every purchase an
average cost is computed from the cost of purchases and the cost of stock. This method tries
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
advantage due to that expenditure. It is usually incurred for accusation of an asset. These
expenditures do not occur in the regular day to day transactions of the business. OR An
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
or machinery Expenditure incurred in connection with the purchase of a fixed asset. For
example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
Buy a car is capital expenditure because its benefit to the business will be spread over a
long time.
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
either by owner or shareholder of the business? or from sale of fixed assets of the
business.
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
f. Deferred Revenues : Payments received in advance of services performed or goods being
delivered.
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
year being reported on.
87. Annual Report: A written report to shareholders detailing and summarizing the prior
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
89. Audit Report: A report issued by an independent CPA that expresses some opinion
about the financial statements the report is attached to.
90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
91. Dividend: A portion of the company's profits paid to common and/or preferred
shareholders. Dividends represent profits that are not reinvested by the corporation.
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
9 3 . Holding company: A corporation that holds a majority of the shares outstanding of a
subsidiary company
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
manager has had so much information about a debtor company's financial condition, plans,
goals, short?term and long?term strategy, and the competitive environment in which it
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
publicly traded companies c [ ompanies selling stocks and/ or bonds] .
96. Face Value: The stated value of a bond certificate.
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
98. Fair Market Value: The market value of an asset as determined by supply and demand
99. Earnings per share: Earnings stated as a dollar value per share of stock.
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
statement, and cash?flow statement as well as notes to the financial statements and the
auditor's opinion letter. Financial statements report the financial status and results of
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
Financial statements that report the combined operating results of two or more legally
separate entities ? such as a parent company and its wholly owned subsidiary.
1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
presented.
105. The Objective Evidence Requirement: The requirement involves the fact that
people would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
system that is used extensively in business and industry, government, and nonprofit
organizations worldwide to align business activities to the vision and strategy of the
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
strategic non?financial performance measures to traditional financial metrics to give
managers and executives a more 'balanced' view of organizational performance.
organization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
108. Human Resource Accounting is the process of identifying and reporting the
Investments made in the Human Resources of an Organisation that are presently not
109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
this objective taxpayer may resort to following Three Methods:
o Tax Planning
o Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
exemptions, deductions and rebates provided in Act. The Income Tax law
itself provides for various methods for Tax Planning, Generally it is provided under
provisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
exempt from tax.
o Exemptions u/s 10A, 10B, and 10BA
o Choice of accounting system
o Choice of organization.
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FirstRanker.com - FirstRanker's Choice
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
equity on a particular date.
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
terms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
in more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
not paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
account terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
collateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
of the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
each year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
83 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
the first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
This method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
8
average cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
expenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
long time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
business.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
delivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
about the financial statements the report is attached to.
9
90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
shareholders. Dividends represent profits that are not reinvested by the corporation.
92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
subsidiary company
94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
goals, short?term and long?term strategy, and the competitive environment in which it
operates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
96. Face Value: The stated value of a bond certificate.
97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
99. Earnings per share: Earnings stated as a dollar value per share of stock.
100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
auditor's opinion letter. Financial statements report the financial status and results of
operations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
separate entities ? such as a parent company and its wholly owned subsidiary.
103. Interim financial statements: Financial statements for periods of less than one year.
1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
105. The Objective Evidence Requirement: The requirement involves the fact that
financial statements must be based on hard evidence and documentation that reasonable
people would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
organizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
managers and executives a more 'balanced' view of organizational performance.
107. Balanced scorecard methodology is an analysis technique designed to translate an
organization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
Investments made in the Human Resources of an Organisation that are presently not
accounted for in the conventional accounting practices.
109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
o Tax Planning
o Tax Avoidance
o Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
itself provides for various methods for Tax Planning, Generally it is provided under
exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief?s. Some of the
provisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
o Exemptions u/s 10A, 10B, and 10BA
o Residential Status of the person
o Choice of accounting system
o Choice of organization.
o
For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.
o
depreciation. If is his exclusive right either to buy or lease it . In the same manner to
choice the form of organization, capital structure, buys or make products are the
assessee ? s exclusive right. One may look for various tax incentives in the above said
transactions provided in this Act, for reduction of tax liability. All this transaction
b. Tax Evasion : An illegal practice where a person, organization or corporation
intentionally avoids paying his/her/its true tax liability. Those caught evading taxes
are generally subject to criminal charges and substantial penalties.
There is a difference between tax minimization/avoidance and tax evasion. All citizens have
c. Tax avoidance : The use of legal methods to modify an individual's financial situation
in order to lower the amount of income tax owed. This is generally accomplished by
claiming the permissible deductions and credits. This practice differs from tax
evasion, which is illegal.
employer?sponsored retirement plans with pre?tax funds are engaging in tax avoidance
because the amount of taxes paid on the funds when they are withdrawn is usually less than
the amount that the individual would owe today. Furthermore, retirement plans allow
taxpayers to defer paying taxes until a much later date, which allows their savings to grow at
110. Indian Accounting Standards , (abbreviated as India AS) are a set of accounting
standards notified by the Ministry of Corporate Affairs which are converged with
International Financial Reporting Standards (IFRS). These accounting standards are
formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
practices for CP As and other accountants.
112. FASB: The Financial Accounting Standards Board is a private organization that
established Generally Accepted Accounting Principles.
113. Qualified opinion: An opinion of an independent auditor in which the auditor states the
necessary to offer an Unqualified Opinion letter.
114. Disclaimer of opinion: A statement by an auditor that he or she was unable to satisfy
the requirement that the financial statements presented followed GAAP.
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
equity on a particular date.
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
terms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
in more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
not paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
account terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
collateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
of the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
each year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
83 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
the first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
This method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
8
average cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
expenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
long time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
business.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
delivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
about the financial statements the report is attached to.
9
90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
shareholders. Dividends represent profits that are not reinvested by the corporation.
92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
subsidiary company
94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
goals, short?term and long?term strategy, and the competitive environment in which it
operates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
96. Face Value: The stated value of a bond certificate.
97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
99. Earnings per share: Earnings stated as a dollar value per share of stock.
100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
auditor's opinion letter. Financial statements report the financial status and results of
operations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
separate entities ? such as a parent company and its wholly owned subsidiary.
103. Interim financial statements: Financial statements for periods of less than one year.
1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
105. The Objective Evidence Requirement: The requirement involves the fact that
financial statements must be based on hard evidence and documentation that reasonable
people would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
organizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
managers and executives a more 'balanced' view of organizational performance.
107. Balanced scorecard methodology is an analysis technique designed to translate an
organization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
Investments made in the Human Resources of an Organisation that are presently not
accounted for in the conventional accounting practices.
109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
o Tax Planning
o Tax Avoidance
o Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
itself provides for various methods for Tax Planning, Generally it is provided under
exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief?s. Some of the
provisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
o Exemptions u/s 10A, 10B, and 10BA
o Residential Status of the person
o Choice of accounting system
o Choice of organization.
o
For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.
o
depreciation. If is his exclusive right either to buy or lease it . In the same manner to
choice the form of organization, capital structure, buys or make products are the
assessee ? s exclusive right. One may look for various tax incentives in the above said
transactions provided in this Act, for reduction of tax liability. All this transaction
b. Tax Evasion : An illegal practice where a person, organization or corporation
intentionally avoids paying his/her/its true tax liability. Those caught evading taxes
are generally subject to criminal charges and substantial penalties.
There is a difference between tax minimization/avoidance and tax evasion. All citizens have
c. Tax avoidance : The use of legal methods to modify an individual's financial situation
in order to lower the amount of income tax owed. This is generally accomplished by
claiming the permissible deductions and credits. This practice differs from tax
evasion, which is illegal.
employer?sponsored retirement plans with pre?tax funds are engaging in tax avoidance
because the amount of taxes paid on the funds when they are withdrawn is usually less than
the amount that the individual would owe today. Furthermore, retirement plans allow
taxpayers to defer paying taxes until a much later date, which allows their savings to grow at
110. Indian Accounting Standards , (abbreviated as India AS) are a set of accounting
standards notified by the Ministry of Corporate Affairs which are converged with
International Financial Reporting Standards (IFRS). These accounting standards are
formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
practices for CP As and other accountants.
112. FASB: The Financial Accounting Standards Board is a private organization that
established Generally Accepted Accounting Principles.
113. Qualified opinion: An opinion of an independent auditor in which the auditor states the
necessary to offer an Unqualified Opinion letter.
114. Disclaimer of opinion: A statement by an auditor that he or she was unable to satisfy
the requirement that the financial statements presented followed GAAP.
1 1 5. Hedging: The process of lowering risk by purchasing a security or another product that
116. Lease: A contract that specifies for how long, for what cost, and under what terms and
conditions the owner of an asset [the lessor] agrees to transfer the right to use the asset to
another party t[he lessee].
117. Capital lease: A lease that is, in effect, a purchase made by the lessee. The leased
the leased property.
118. Break?even analysis: A calculation to determine the level of sales at which the
company will break even?the point at which net income is zero.
119. Depletion: The process of cost allocation on a non?renewable natural resource.
ratio. Leverage is positive to the extent that the money borrowed generated more income than
is required to repay the debt and to justify the higher interest costs.
121. Exchange rate: The value of one currency in terms of another currency.
122. Liquidation: The process of dissolving a business and selling the assets of the business
FirstRanker.com - FirstRanker's Choice
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
--- Content provided by FirstRanker.com ---
Financial capital maintenance can be measured in either nominal monetary units or units ofconstant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
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the time they occur to their inclusion in financial statements) pertaining to an accountingperiod.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
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(6) closing the temporary account.3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
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4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is calledsuspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
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receivable.6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
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FirstRanker.com - FirstRanker's ChoiceDepartment of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
--- Content provided by FirstRanker.com ---
,suppliers, banks, employees, government agencies, owners, and other stakeholders.Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
--- Content provided by FirstRanker.com ---
Accounting Cycle: The sequence of six steps in the processing of financial transactions (fromthe time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
--- Content provided by FirstRanker.com ---
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
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equal the total credits. It can be expressed as4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
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collection period for receivables. The formula is net sales divided by average accountsreceivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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17. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
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9. Amortization: A process of cost allocation? a process of gradually reducing the value ofan intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
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11. Fiscal year: Any continuous 12 month accounting period used by a company as itsaccounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
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13. Consistency Principle: It states that companies must use the same accounting methodfrom period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
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existence for the foreseeable future. If the auditor has a questions about the viability of thecompany, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
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16. Conservatism Principle: This principle states that given a choice of options anindependent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
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income for an accounting period.18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
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represented by stock.20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
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--- Content provided by FirstRanker.com ---
Department of Business ManagementCONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
--- Content provided by FirstRanker.com ---
Financial capital maintenance can be measured in either nominal monetary units or units ofconstant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
--- Content provided by FirstRanker.com ---
the time they occur to their inclusion in financial statements) pertaining to an accountingperiod.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
--- Content provided by FirstRanker.com ---
(6) closing the temporary account.3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
--- Content provided by FirstRanker.com ---
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is calledsuspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
--- Content provided by FirstRanker.com ---
receivable.6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes andwages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
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an intangible asset over time by allocating a cost of the asset to the accounting periods itbenefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
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accounting year.12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
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from period to period, and that in the event that a company elects to change certainaccounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
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independent accountant must select an accounting method that has the least favorable impacton the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
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18. Materiality: The principle that only items that are of sufficient size to be relevant to thereader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
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20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'equity on a particular date.
2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
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23. Classified balance sheet: A balance sheet in which assets and liabilities are divided intocurrent and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
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27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life ofmore than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
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30. Goodwill: The difference between the acquisition cost of an asset and the fair marketvalue or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
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lawsuit is unknown.32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
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Current assets include cash and any other asset that is expected to be converted into cash inthe ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
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by current liabilities.37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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3FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
--- Content provided by FirstRanker.com ---
with the preparation of financial statements for decision makers, such as stockholders,,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
--- Content provided by FirstRanker.com ---
Accounting methods include "cash basis" accounting and "accrual basis" accounting.Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
--- Content provided by FirstRanker.com ---
the journals, (3) posting debits and credits from journal entries to the general ledger,(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
--- Content provided by FirstRanker.com ---
foundation for the double?entry bookkeeping system. For each transaction, the total debitsequal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
--- Content provided by FirstRanker.com ---
5. Accounts receivable turnover: A method used to determine a company's averagecollection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
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recognized when they are incurred, regardless of when the expenses are paid.1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
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apply it consistently.9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
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the equality of the accounting equation.11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
--- Content provided by FirstRanker.com ---
and schedules, including footnotes.13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
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14. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
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with the expenses required to generate those revenues in order to accurately present netincome for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
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19. Corporation: A legal entity chartered by a state. Ownership of a corporation isrepresented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
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2 1 . Total assets: All current assets, fixed assets, and other assets.22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
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25. Liabilities: Debt owed by a company.26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
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29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristicsthat are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
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contingent liabilities are indefinite as to time or cost but represent a potential obligation.Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
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term and long term financial obligations34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
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one year, or the current operating cycle.36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
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ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notesreceivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
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statements. Accounts receivable is normally stated net of an allowance for uncollectableaccounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
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convertible into cash42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
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divided by interest expense.45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
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might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratiomight also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
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liabilities48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
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from the other two statements (Income Statement and Balance Sheet) to indicate cash inflowsand outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
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v' F inancing A ctivitiesa. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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4FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
--- Content provided by FirstRanker.com ---
with the preparation of financial statements for decision makers, such as stockholders,,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
--- Content provided by FirstRanker.com ---
Accounting methods include "cash basis" accounting and "accrual basis" accounting.Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
--- Content provided by FirstRanker.com ---
the journals, (3) posting debits and credits from journal entries to the general ledger,(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
--- Content provided by FirstRanker.com ---
foundation for the double?entry bookkeeping system. For each transaction, the total debitsequal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
--- Content provided by FirstRanker.com ---
5. Accounts receivable turnover: A method used to determine a company's averagecollection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
--- Content provided by FirstRanker.com ---
recognized when they are incurred, regardless of when the expenses are paid.1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
--- Content provided by FirstRanker.com ---
apply it consistently.9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
--- Content provided by FirstRanker.com ---
the equality of the accounting equation.11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
--- Content provided by FirstRanker.com ---
and schedules, including footnotes.13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
--- Content provided by FirstRanker.com ---
14. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
--- Content provided by FirstRanker.com ---
company, that information will be reflected in its opinion letter.16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
--- Content provided by FirstRanker.com ---
with the expenses required to generate those revenues in order to accurately present netincome for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
--- Content provided by FirstRanker.com ---
19. Corporation: A legal entity chartered by a state. Ownership of a corporation isrepresented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
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2 1 . Total assets: All current assets, fixed assets, and other assets.22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
--- Content provided by FirstRanker.com ---
25. Liabilities: Debt owed by a company.26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
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29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristicsthat are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
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contingent liabilities are indefinite as to time or cost but represent a potential obligation.Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
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term and long term financial obligations34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
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one year, or the current operating cycle.36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
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ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notesreceivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
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statements. Accounts receivable is normally stated net of an allowance for uncollectableaccounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
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convertible into cash42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
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divided by interest expense.45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
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might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratiomight also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
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liabilities48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
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from the other two statements (Income Statement and Balance Sheet) to indicate cash inflowsand outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
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v' F inancing A ctivitiesa. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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4this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
b. Investing Activities
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Investing activities include transactions with assets, marketable securities and creditinstruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
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c. Financing ActivitiesFinancing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
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ledger accounts.49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
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equity section of the balance sheet, by the number of shares of common stock outstanding.51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
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is subordinated to all other claims and classes of claims.52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
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Stockholder: A person or company that owns one or more share of stock in a company.54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
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56. Convertible bonds: Bonds that can be converted into stock at the option of the ownerafter a specified period of time.
5
FirstRanker.com - FirstRanker's Choice
Department of Business Management
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
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constant purchasing power.2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
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period.These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
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3. The basic accounting equation, also called the balance sheet equation, represents therelationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
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suspense account. Suspense account is opened for a temporarily period only. Suspenseaccount shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
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6. Accrual basis of accounting: An accounting system in which revenues are recognizedwhen earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
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wages. (Accrue means to accumulate.)8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
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benefits.10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
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12. Full Disclosure Requirement: This is a requirement that a company disclose all factsand information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
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accounting methods, that fact along with an analysis of the impact of that accounting changemust be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
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15. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
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on the net income of the company being audited.17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
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reader of a company's financial statements will be included in the financial statements andfootnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
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equity on a particular date.2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
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current and non?current.24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
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more than one year.28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
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value or book value of an asset.31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
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32. Liquidity: The ability to sell assets to generate cash to pay debts.33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
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the ordinary course of business within one year.35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
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37. Quick assets: Current assets minus inventory? also called Liquid assets.38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
3
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39. Accounts receivable: Money due for services performed or goods delivered on openaccount terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
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inventory.41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
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43. Bad debt: An uncollectible accounts receivable balance.44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
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46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock dividedby the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
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47. Working capital: Current assets minus current liabilities. Working capital is the amountof cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
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Cash flow statements signify the changes in the cash and cash equivalents of the business dueto the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
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v' Operating A ctivitiesv' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
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from selling goods and services represent the inflows. The revenues from interest anddividends are also included here. The operational expenditures are considered as outflows for
4
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
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terms.b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
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cash outflows. Loans made to borrowers for long?term use is another cash outflow.Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
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repays loans, purchases treasury stock or pays dividends to stockholders. As the case withother activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
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flow statements.50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
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stock shares give the investor a vote on matters including the election of the company'sdirectors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
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payments and in the event of asset liquidation.53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
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than one year. A bond is a debt security that represents an obligation of the issuer to payinterest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
5
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by acorporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
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in more than one year.59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
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not paid by a corporation to its stockholders in the form of dividends.61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
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account terms and other resources.64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
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collateral.67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
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often issued to key personnel as a type of bonus. In many companies, warrants are used as aretention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
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71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods soldduring an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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6FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
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with the preparation of financial statements for decision makers, such as stockholders,,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
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Accounting methods include "cash basis" accounting and "accrual basis" accounting.Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
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the journals, (3) posting debits and credits from journal entries to the general ledger,(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
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foundation for the double?entry bookkeeping system. For each transaction, the total debitsequal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
--- Content provided by FirstRanker.com ---
5. Accounts receivable turnover: A method used to determine a company's averagecollection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
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recognized when they are incurred, regardless of when the expenses are paid.1
7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
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apply it consistently.9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
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the equality of the accounting equation.11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
--- Content provided by FirstRanker.com ---
and schedules, including footnotes.13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
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14. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
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with the expenses required to generate those revenues in order to accurately present netincome for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
footnotes
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19. Corporation: A legal entity chartered by a state. Ownership of a corporation isrepresented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
2
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2 1 . Total assets: All current assets, fixed assets, and other assets.22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
24. Assets: Economic resources owned or controlled by the company.
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25. Liabilities: Debt owed by a company.26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
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29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristicsthat are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
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contingent liabilities are indefinite as to time or cost but represent a potential obligation.Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
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term and long term financial obligations34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
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one year, or the current operating cycle.36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
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ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notesreceivable Divided by Current liabilities.
3
39. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
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statements. Accounts receivable is normally stated net of an allowance for uncollectableaccounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
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convertible into cash42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
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divided by interest expense.45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
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might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratiomight also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
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liabilities48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
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from the other two statements (Income Statement and Balance Sheet) to indicate cash inflowsand outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
v' InvestingA ctivities
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v' F inancing A ctivitiesa. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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4this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
b. Investing Activities
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Investing activities include transactions with assets, marketable securities and creditinstruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
--- Content provided by FirstRanker.com ---
c. Financing ActivitiesFinancing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
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ledger accounts.49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
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equity section of the balance sheet, by the number of shares of common stock outstanding.51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
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is subordinated to all other claims and classes of claims.52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
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Stockholder: A person or company that owns one or more share of stock in a company.54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
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56. Convertible bonds: Bonds that can be converted into stock at the option of the ownerafter a specified period of time.
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
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maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
in more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
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pledge of collateral such as one or more tangible assets of the issuer.60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
not paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
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62. Note payable: A debt? a short?term obligation evidenced by a contract such as apromissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
account terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
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company in a buy?back.65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
collateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
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with a good to excellent credit rating to raise cash quickly. Typically, commercial papermatures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
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69. P & L: Acronym for Profit and Loss Statement / Income Statement.70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
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72. Net Income: Net income is income after tax has been paid but before payment ofpreferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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74. Expenses: The costs incurred in the normal course of business to generate revenues and
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profits.75. Discretionary expenses: Expenses under the control of management with respect to
timing.
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
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78. EBIT: Earnings before interest and taxes paid.79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
of the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
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value of assets (fair value depreciation), and the allocation of the cost of assets to periods inwhich the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
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useful life of the asset. Subsequent events are significant events from an accountingperspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
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c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixedasset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
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of its useful life. Under the sinking fund method, the business sets aside an amount of moneyto invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
each year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
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can be earned through the effects of compound interest. The sinking fund method is notcommon, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
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82. Book value of a depreciable asset: The historical or acquisition cost of a depreciableasset minus the accumulated depreciation on that asset.
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Department of Business Management
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
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constant purchasing power.2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
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period.These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
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3. The basic accounting equation, also called the balance sheet equation, represents therelationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
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suspense account. Suspense account is opened for a temporarily period only. Suspenseaccount shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
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6. Accrual basis of accounting: An accounting system in which revenues are recognizedwhen earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
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wages. (Accrue means to accumulate.)8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
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benefits.10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
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12. Full Disclosure Requirement: This is a requirement that a company disclose all factsand information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
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accounting methods, that fact along with an analysis of the impact of that accounting changemust be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
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15. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
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on the net income of the company being audited.17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
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reader of a company's financial statements will be included in the financial statements andfootnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
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equity on a particular date.2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
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current and non?current.24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
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more than one year.28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
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value or book value of an asset.31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
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32. Liquidity: The ability to sell assets to generate cash to pay debts.33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
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the ordinary course of business within one year.35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
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37. Quick assets: Current assets minus inventory? also called Liquid assets.38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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39. Accounts receivable: Money due for services performed or goods delivered on openaccount terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
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inventory.41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
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43. Bad debt: An uncollectible accounts receivable balance.44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
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46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock dividedby the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
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47. Working capital: Current assets minus current liabilities. Working capital is the amountof cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
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Cash flow statements signify the changes in the cash and cash equivalents of the business dueto the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
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v' Operating A ctivitiesv' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
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from selling goods and services represent the inflows. The revenues from interest anddividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
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terms.b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
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cash outflows. Loans made to borrowers for long?term use is another cash outflow.Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
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repays loans, purchases treasury stock or pays dividends to stockholders. As the case withother activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
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flow statements.50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
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stock shares give the investor a vote on matters including the election of the company'sdirectors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
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payments and in the event of asset liquidation.53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
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than one year. A bond is a debt security that represents an obligation of the issuer to payinterest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by acorporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
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in more than one year.59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
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not paid by a corporation to its stockholders in the form of dividends.61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
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account terms and other resources.64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
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collateral.67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
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often issued to key personnel as a type of bonus. In many companies, warrants are used as aretention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
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71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods soldduring an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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674. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
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76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
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of the cost of the asset over the useful life of that asset.In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
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a. Straight? line: This method spreads the cost of the fixed asset evenly over its usefullife. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
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b. Declining?balance: An accelerated method of depreciation, it results in higherdepreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
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d. Sinking fund method: A technique for depreciating an asset in bookkeeping recordswhile also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
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each year is calculated by determining how much it will cost to replace the asset, how manyyears the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
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depreciation. As a result, the value of an asset as recorded on the balance sheet may havelittle in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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83 . Accumulated Depreciation: The total depreciation recorded against an asset since itsacquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
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a. The First1?In?First?Out Method(FIFO )A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
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because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
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understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
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the first goods sold.This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
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This method assumes that we sell all our inventories simultaneously.The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
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So we work out an average cost for all chemicals that we have in our possession. The methodspecifically involves working out an average cost per unit at each point in time after a
purchase.
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Department of Business ManagementCONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
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Financial capital maintenance can be measured in either nominal monetary units or units ofconstant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
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the time they occur to their inclusion in financial statements) pertaining to an accountingperiod.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
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(6) closing the temporary account.3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
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4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is calledsuspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
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receivable.6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes andwages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
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an intangible asset over time by allocating a cost of the asset to the accounting periods itbenefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
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accounting year.12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
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from period to period, and that in the event that a company elects to change certainaccounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
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independent accountant must select an accounting method that has the least favorable impacton the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
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18. Materiality: The principle that only items that are of sufficient size to be relevant to thereader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
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20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'equity on a particular date.
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2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
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23. Classified balance sheet: A balance sheet in which assets and liabilities are divided intocurrent and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
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27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life ofmore than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
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30. Goodwill: The difference between the acquisition cost of an asset and the fair marketvalue or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
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lawsuit is unknown.32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
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Current assets include cash and any other asset that is expected to be converted into cash inthe ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
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by current liabilities.37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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339. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
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40. Inventory: Inventory includes raw materials, work in progress, and finished goodsinventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
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been delivered or received.43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
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by the average inventory value for that period.46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
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future than it is today.47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
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entities cash inflows and its cash outflows during an accounting period.Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
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A Cash Flow Statement comprises information on following 3 activities:v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
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Operating activities include cash flows from all standard business operations. Cash receiptsfrom selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
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included .Dividends are considered as a part of financing activity in financial accountingterms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
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inflow. Purchasing property, plant and equipment or marketable securities are considered ascash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
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receipts come from borrowing money or issuing stock. The outflows occur when a companyrepays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
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capital from its operations in a single time period, but have largely been superseded by cashflow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
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common stockholders after all debts and other obligations have been paid in full. Commonstock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
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carries a specific, stated dividend rate and a priority over com?mon stock in dividendpayments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
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55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of morethan one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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557. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
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58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities duein more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
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stockholders. Specifically, retained earnings represent the cumulative amount of net profitsnot paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
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63. Accounts payable: Money owed to suppliers of goods and services delivered on openaccount terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
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66. Unsecured Debt: An obligation of a company of corporation not backed by any specificcollateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
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68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants areoften issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
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loss).71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
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73. Net sales: Gross sales (total sales) minus sales returns and allowances.6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
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timing.76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
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80. Depreciation: The reduction in value of a capital asset over time, specifically allocationof the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
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balance sheet of a business or entity, and the latter affects the net income that they report.a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
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issued. Subsidiary: A company or a corporation that is owned and controlled by another.b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
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to the total number of years.d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
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replace the asset. The amount of money that needs to be added to the asset?replacement fundeach year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
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81. Historical cost: Most assets are recorded at their historical cost less accumulateddepreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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783 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
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an inventory valuation and different approaches to maintaining records about inventory.a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
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use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
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stocks and overstatement of profits and in case of falling prices this method leads tounderstatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
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LIFO: A method of valuing inventory in which the last goods purchased are assumed to bethe first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
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d. The Weighted Average Cost MethodThis method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
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bought yesterday, as they are all mixed together.So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
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Weighted Average Method Here the average cost is applied i.e. after every purchase anaverage cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
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advantage due to that expenditure. It is usually incurred for accusation of an asset. Theseexpenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
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or machinery Expenditure incurred in connection with the purchase of a fixed asset. Forexample, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
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Buy a car is capital expenditure because its benefit to the business will be spread over along time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
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either by owner or shareholder of the business? or from sale of fixed assets of thebusiness.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
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f. Deferred Revenues : Payments received in advance of services performed or goods beingdelivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
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year being reported on.87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
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89. Audit Report: A report issued by an independent CPA that expresses some opinionabout the financial statements the report is attached to.
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Department of Business Management
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CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
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constant purchasing power.2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
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period.These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
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3. The basic accounting equation, also called the balance sheet equation, represents therelationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
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suspense account. Suspense account is opened for a temporarily period only. Suspenseaccount shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
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6. Accrual basis of accounting: An accounting system in which revenues are recognizedwhen earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
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wages. (Accrue means to accumulate.)8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
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benefits.10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
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12. Full Disclosure Requirement: This is a requirement that a company disclose all factsand information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
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accounting methods, that fact along with an analysis of the impact of that accounting changemust be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
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15. Going Concern: The accounting concept that an company will have a continuingexistence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
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on the net income of the company being audited.17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
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reader of a company's financial statements will be included in the financial statements andfootnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
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equity on a particular date.2
2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
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current and non?current.24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
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more than one year.28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
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value or book value of an asset.31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
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32. Liquidity: The ability to sell assets to generate cash to pay debts.33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
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the ordinary course of business within one year.35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
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37. Quick assets: Current assets minus inventory? also called Liquid assets.38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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39. Accounts receivable: Money due for services performed or goods delivered on openaccount terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
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inventory.41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
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43. Bad debt: An uncollectible accounts receivable balance.44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
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46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock dividedby the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
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47. Working capital: Current assets minus current liabilities. Working capital is the amountof cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
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Cash flow statements signify the changes in the cash and cash equivalents of the business dueto the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
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v' Operating A ctivitiesv' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
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from selling goods and services represent the inflows. The revenues from interest anddividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
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terms.b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
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cash outflows. Loans made to borrowers for long?term use is another cash outflow.Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
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repays loans, purchases treasury stock or pays dividends to stockholders. As the case withother activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
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flow statements.50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
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stock shares give the investor a vote on matters including the election of the company'sdirectors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
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payments and in the event of asset liquidation.53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
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than one year. A bond is a debt security that represents an obligation of the issuer to payinterest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by acorporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
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in more than one year.59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
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not paid by a corporation to its stockholders in the form of dividends.61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
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account terms and other resources.64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
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collateral.67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
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often issued to key personnel as a type of bonus. In many companies, warrants are used as aretention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
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71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods soldduring an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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674. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
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76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
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of the cost of the asset over the useful life of that asset.In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
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a. Straight? line: This method spreads the cost of the fixed asset evenly over its usefullife. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
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b. Declining?balance: An accelerated method of depreciation, it results in higherdepreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
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d. Sinking fund method: A technique for depreciating an asset in bookkeeping recordswhile also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
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each year is calculated by determining how much it will cost to replace the asset, how manyyears the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
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depreciation. As a result, the value of an asset as recorded on the balance sheet may havelittle in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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83 . Accumulated Depreciation: The total depreciation recorded against an asset since itsacquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
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a. The First1?In?First?Out Method(FIFO )A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
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because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
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understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
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the first goods sold.This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
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This method assumes that we sell all our inventories simultaneously.The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
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So we work out an average cost for all chemicals that we have in our possession. The methodspecifically involves working out an average cost per unit at each point in time after a
purchase.
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Weighted Average Method Here the average cost is applied i.e. after every purchase an
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average cost is computed from the cost of purchases and the cost of stock. This method triesto even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
advantage due to that expenditure. It is usually incurred for accusation of an asset. These
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expenditures do not occur in the regular day to day transactions of the business. OR Anexpenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
or machinery Expenditure incurred in connection with the purchase of a fixed asset. For
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example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
Buy a car is capital expenditure because its benefit to the business will be spread over a
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long time.Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
either by owner or shareholder of the business? or from sale of fixed assets of the
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business.e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
f. Deferred Revenues : Payments received in advance of services performed or goods being
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delivered.86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
year being reported on.
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87. Annual Report: A written report to shareholders detailing and summarizing the priorfiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
89. Audit Report: A report issued by an independent CPA that expresses some opinion
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about the financial statements the report is attached to.9
90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
91. Dividend: A portion of the company's profits paid to common and/or preferred
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shareholders. Dividends represent profits that are not reinvested by the corporation.92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
9 3 . Holding company: A corporation that holds a majority of the shares outstanding of a
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subsidiary company94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
manager has had so much information about a debtor company's financial condition, plans,
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goals, short?term and long?term strategy, and the competitive environment in which itoperates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
publicly traded companies c [ ompanies selling stocks and/ or bonds] .
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96. Face Value: The stated value of a bond certificate.97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
98. Fair Market Value: The market value of an asset as determined by supply and demand
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99. Earnings per share: Earnings stated as a dollar value per share of stock.100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
statement, and cash?flow statement as well as notes to the financial statements and the
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auditor's opinion letter. Financial statements report the financial status and results ofoperations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
Financial statements that report the combined operating results of two or more legally
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separate entities ? such as a parent company and its wholly owned subsidiary.103. Interim financial statements: Financial statements for periods of less than one year.
FirstRanker.com - FirstRanker's Choice
Department of Business Management
CONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
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1. Financial accountancy (or financial accounting) is the field of accountancy concernedwith the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.
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2. Accounting method: The technique used to report sales, expenses, and profits.Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
the time they occur to their inclusion in financial statements) pertaining to an accounting
period.
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These steps are: (1) analyzing the transactions as they occur, (2) recording them inthe journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
(6) closing the temporary account.
3. The basic accounting equation, also called the balance sheet equation, represents the
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relationship between the assets, liabilities, and owner's equity of a business. It is thefoundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is called
suspense account. Suspense account is opened for a temporarily period only. Suspense
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account shows no balance after rectification of all errors and it disappears automatically.5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
receivable.
6. Accrual basis of accounting: An accounting system in which revenues are recognized
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when earned, regardless of when the cash is actually received. Similarly, expenses arerecognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes and
wages. (Accrue means to accumulate.)
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8. Cash or Accrual Basis accounting: A company will select one method or the other andapply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
an intangible asset over time by allocating a cost of the asset to the accounting periods it
benefits.
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10. Double Entry Accounting: A method of recording accounting transactions to maintainthe equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
accounting year.
12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
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and information that are relevant to readers of financial statements including standard reportsand schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
from period to period, and that in the event that a company elects to change certain
accounting methods, that fact along with an analysis of the impact of that accounting change
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must be reported on the financial statements in footnotes.14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
15. Going Concern: The accounting concept that an company will have a continuing
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existence for the foreseeable future. If the auditor has a questions about the viability of thecompany, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
independent accountant must select an accounting method that has the least favorable impact
on the net income of the company being audited.
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17. Matching principle: The accounting principle that states that revenues must be matchedwith the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
18. Materiality: The principle that only items that are of sufficient size to be relevant to the
reader of a company's financial statements will be included in the financial statements and
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footnotes19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'
equity on a particular date.
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22 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
23. Classified balance sheet: A balance sheet in which assets and liabilities are divided into
current and non?current.
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24. Assets: Economic resources owned or controlled by the company.25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life of
more than one year.
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28.Tangible asset: Tangible assets include property, plant, and equipment.29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
30. Goodwill: The difference between the acquisition cost of an asset and the fair market
value or book value of an asset.
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31. Contingent liabilities: Typically identified in the notes to the financial statements,contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
lawsuit is unknown.
32. Liquidity: The ability to sell assets to generate cash to pay debts.
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33. Solvency: A somewhat subjective measure of a business entity's ability to meet its shortterm and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
Current assets include cash and any other asset that is expected to be converted into cash in
the ordinary course of business within one year.
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35. Current liabilities: The sum of all money owed by the company that is payable withinone year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
by current liabilities.
37. Quick assets: Current assets minus inventory? also called Liquid assets.
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38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quickratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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39. Accounts receivable: Money due for services performed or goods delivered on open
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account terms. Accounts receivable pledged as collateral would be footnoted on the financialstatements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
40. Inventory: Inventory includes raw materials, work in progress, and finished goods
inventory.
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41. Cash equivalents: Short term, highly liquid investments held in place of cash and readilyconvertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
been delivered or received.
43. Bad debt: An uncollectible accounts receivable balance.
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44. Interest coverage: Interest coverage is defined as earnings before interest and taxesdivided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
by the average inventory value for that period.
46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
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by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratiomight mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
future than it is today.
47. Working capital: Current assets minus current liabilities. Working capital is the amount
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of cash a company expects to generate in the short term and have available to retire currentliabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
entities cash inflows and its cash outflows during an accounting period.
Cash flow statements signify the changes in the cash and cash equivalents of the business due
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to the business operations in one time period. The statement of cash flows uses informationfrom the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
A Cash Flow Statement comprises information on following 3 activities:
v' Operating A ctivities
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v' InvestingA ctivitiesv' F inancing A ctivities
a. Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts
from selling goods and services represent the inflows. The revenues from interest and
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dividends are also included here. The operational expenditures are considered as outflows for4
this section. Although interest expenses fall under this section but the dividends are not
included .Dividends are considered as a part of financing activity in financial accounting
terms.
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b. Investing ActivitiesInvesting activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
inflow. Purchasing property, plant and equipment or marketable securities are considered as
cash outflows. Loans made to borrowers for long?term use is another cash outflow.
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Collections from these loans, however, are cash inflows.c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
receipts come from borrowing money or issuing stock. The outflows occur when a company
repays loans, purchases treasury stock or pays dividends to stockholders. As the case with
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other activities on the statement of cash flows depend on activities rather than actual generalledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
capital from its operations in a single time period, but have largely been superseded by cash
flow statements.
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50. Book value: A calculation done by dividing equity of common shares, as listed in theequity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
common stockholders after all debts and other obligations have been paid in full. Common
stock shares give the investor a vote on matters including the election of the company's
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directors. Common stockholders bear the ultimate risk of loss in liquidation since their claimis subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
carries a specific, stated dividend rate and a priority over com?mon stock in dividend
payments and in the event of asset liquidation.
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53. Stock: Ownership claims on the assets of a business after all creditors have been paid.Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of more
than one year. A bond is a debt security that represents an obligation of the issuer to pay
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interest to the creditor and to repay the principal at maturity.56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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57. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
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corporation to the bondholder. They typically include an interest rate as well as a specificmaturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities due
in more than one year.
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59. Debenture: A debenture is a bond issued by a corporation that is not backed by thepledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
stockholders. Specifically, retained earnings represent the cumulative amount of net profits
not paid by a corporation to its stockholders in the form of dividends.
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61. Net worth: Assets minus liabilities equals net worth.62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
63. Accounts payable: Money owed to suppliers of goods and services delivered on open
account terms and other resources.
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64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by thecompany in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
66. Unsecured Debt: An obligation of a company of corporation not backed by any specific
collateral.
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67. Commercial Paper: A short term debt represented by a note issued by a corporationwith a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants are
often issued to key personnel as a type of bonus. In many companies, warrants are used as a
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retention incentive or bonus.69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
loss).
71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
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during an accounting period72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
73. Net sales: Gross sales (total sales) minus sales returns and allowances.
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74. Expenses: The costs incurred in the normal course of business to generate revenues andprofits.
75. Discretionary expenses: Expenses under the control of management with respect to
timing.
76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
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77. Gross sales: Sales before deducting for any sales returns or allowances.78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
80. Depreciation: The reduction in value of a capital asset over time, specifically allocation
of the cost of the asset over the useful life of that asset.
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In Accountancy, depreciation refers to two aspects of the same concept: the decrease invalue of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
balance sheet of a business or entity, and the latter affects the net income that they report.
a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
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life. An accounting procedure in which the value of assets is depreciated evenly over theuseful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
issued. Subsidiary: A company or a corporation that is owned and controlled by another.
b. Declining?balance: An accelerated method of depreciation, it results in higher
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depreciation expense in the earlier years of ownership.c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
to the total number of years.
d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
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while also generating money to purchase a replacement for the asset when it reaches the endof its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
replace the asset. The amount of money that needs to be added to the asset?replacement fund
each year is calculated by determining how much it will cost to replace the asset, how many
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years the asset is expected to last and what rate of interest can be earned as well as how muchcan be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
81. Historical cost: Most assets are recorded at their historical cost less accumulated
depreciation. As a result, the value of an asset as recorded on the balance sheet may have
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little in common with the market value of that asset.82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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83 . Accumulated Depreciation: The total depreciation recorded against an asset since its
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acquisition.84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
an inventory valuation and different approaches to maintaining records about inventory.
a. The First1?In?First?Out Method(FIFO )
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A method of calculating the cost of inventory in which the first goods purchased are assumedto be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,
because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
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(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hencethe stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
stocks and overstatement of profits and in case of falling prices this method leads to
understatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
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Thus the first?in?first?out method is probably the most commonly used method in smallbusiness.
b. The Last?In?First?Out Method(LIFO)
LIFO: A method of valuing inventory in which the last goods purchased are assumed to be
the first goods sold.
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This method assumes that the last inventories bought are the first ones to be sold, and thatinventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
d. The Weighted Average Cost Method
This method assumes that we sell all our inventories simultaneously.
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The weighted average cost method is most commonly used in manufacturing businesseswhere inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.
So we work out an average cost for all chemicals that we have in our possession. The method
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specifically involves working out an average cost per unit at each point in time after apurchase.
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Weighted Average Method Here the average cost is applied i.e. after every purchase an
average cost is computed from the cost of purchases and the cost of stock. This method tries
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to even out the effects of price fluctuations85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
advantage due to that expenditure. It is usually incurred for accusation of an asset. These
expenditures do not occur in the regular day to day transactions of the business. OR An
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expenditure that is recorded as an asset because the asset purchased is expected to be in usebeyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
or machinery Expenditure incurred in connection with the purchase of a fixed asset. For
example, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
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b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
Buy a car is capital expenditure because its benefit to the business will be spread over a
long time.
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Fuel cost for running this care is revenue expenditure and it will be used up in few daysand does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
either by owner or shareholder of the business? or from sale of fixed assets of the
business.
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e. Revenue receipts : Any receipt in the normal running or through day to day transactionsof the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
f. Deferred Revenues : Payments received in advance of services performed or goods being
delivered.
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86. Financial report: A report prepared by public companies at the end of the company'sfiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
year being reported on.
87. Annual Report: A written report to shareholders detailing and summarizing the prior
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fiscal year's financial performance88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
89. Audit Report: A report issued by an independent CPA that expresses some opinion
about the financial statements the report is attached to.
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990. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
91. Dividend: A portion of the company's profits paid to common and/or preferred
shareholders. Dividends represent profits that are not reinvested by the corporation.
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92. Parent company: A company that owns or controls a separate legal entity. Generally, aparent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
9 3 . Holding company: A corporation that holds a majority of the shares outstanding of a
subsidiary company
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94. Prospectus: A document describing a stock offering by a corporation. A prospectuscontains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
manager has had so much information about a debtor company's financial condition, plans,
goals, short?term and long?term strategy, and the competitive environment in which it
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operates.95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
publicly traded companies c [ ompanies selling stocks and/ or bonds] .
96. Face Value: The stated value of a bond certificate.
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97. Par value: Par value is the face value of a security instrument. Par value is a stated valuebelow which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
98. Fair Market Value: The market value of an asset as determined by supply and demand
99. Earnings per share: Earnings stated as a dollar value per share of stock.
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100. Equity Financing: The process of acquiring funds for a corporation in the form ofadditional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
statement, and cash?flow statement as well as notes to the financial statements and the
auditor's opinion letter. Financial statements report the financial status and results of
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operations of a business entity.102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
Financial statements that report the combined operating results of two or more legally
separate entities ? such as a parent company and its wholly owned subsidiary.
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103. Interim financial statements: Financial statements for periods of less than one year.1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
presented.
105. The Objective Evidence Requirement: The requirement involves the fact that
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financial statements must be based on hard evidence and documentation that reasonablepeople would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
system that is used extensively in business and industry, government, and nonprofit
organizations worldwide to align business activities to the vision and strategy of the
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organization, improve internal and external communications, and monitor organizationperformance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
strategic non?financial performance measures to traditional financial metrics to give
managers and executives a more 'balanced' view of organizational performance.
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107. Balanced scorecard methodology is an analysis technique designed to translate anorganization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
108. Human Resource Accounting is the process of identifying and reporting the
Investments made in the Human Resources of an Organisation that are presently not
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accounted for in the conventional accounting practices.109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
this objective taxpayer may resort to following Three Methods:
o Tax Planning
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o Tax Avoidanceo Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
exemptions, deductions and rebates provided in Act. The Income Tax law
itself provides for various methods for Tax Planning, Generally it is provided under
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exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief?s. Some of theprovisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
exempt from tax.
o Exemptions u/s 10A, 10B, and 10BA
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o Residential Status of the persono Choice of accounting system
o Choice of organization.
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FirstRanker.com - FirstRanker's Choice
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Department of Business ManagementCONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
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Financial capital maintenance can be measured in either nominal monetary units or units ofconstant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
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the time they occur to their inclusion in financial statements) pertaining to an accountingperiod.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
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(6) closing the temporary account.3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
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4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is calledsuspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
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receivable.6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes andwages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
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an intangible asset over time by allocating a cost of the asset to the accounting periods itbenefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
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accounting year.12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
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from period to period, and that in the event that a company elects to change certainaccounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
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independent accountant must select an accounting method that has the least favorable impacton the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
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18. Materiality: The principle that only items that are of sufficient size to be relevant to thereader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
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20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'equity on a particular date.
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2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
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23. Classified balance sheet: A balance sheet in which assets and liabilities are divided intocurrent and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
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27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life ofmore than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
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30. Goodwill: The difference between the acquisition cost of an asset and the fair marketvalue or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
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lawsuit is unknown.32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
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Current assets include cash and any other asset that is expected to be converted into cash inthe ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
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by current liabilities.37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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339. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
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40. Inventory: Inventory includes raw materials, work in progress, and finished goodsinventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
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been delivered or received.43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
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by the average inventory value for that period.46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
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future than it is today.47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
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entities cash inflows and its cash outflows during an accounting period.Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
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A Cash Flow Statement comprises information on following 3 activities:v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
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Operating activities include cash flows from all standard business operations. Cash receiptsfrom selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
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included .Dividends are considered as a part of financing activity in financial accountingterms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
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inflow. Purchasing property, plant and equipment or marketable securities are considered ascash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
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receipts come from borrowing money or issuing stock. The outflows occur when a companyrepays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
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capital from its operations in a single time period, but have largely been superseded by cashflow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
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common stockholders after all debts and other obligations have been paid in full. Commonstock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
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carries a specific, stated dividend rate and a priority over com?mon stock in dividendpayments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
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55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of morethan one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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557. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
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58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities duein more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
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stockholders. Specifically, retained earnings represent the cumulative amount of net profitsnot paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
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63. Accounts payable: Money owed to suppliers of goods and services delivered on openaccount terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
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66. Unsecured Debt: An obligation of a company of corporation not backed by any specificcollateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
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68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants areoften issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
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loss).71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
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73. Net sales: Gross sales (total sales) minus sales returns and allowances.6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
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timing.76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
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80. Depreciation: The reduction in value of a capital asset over time, specifically allocationof the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
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balance sheet of a business or entity, and the latter affects the net income that they report.a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
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issued. Subsidiary: A company or a corporation that is owned and controlled by another.b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
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to the total number of years.d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
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replace the asset. The amount of money that needs to be added to the asset?replacement fundeach year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
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81. Historical cost: Most assets are recorded at their historical cost less accumulateddepreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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783 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
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an inventory valuation and different approaches to maintaining records about inventory.a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
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use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
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stocks and overstatement of profits and in case of falling prices this method leads tounderstatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
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LIFO: A method of valuing inventory in which the last goods purchased are assumed to bethe first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
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d. The Weighted Average Cost MethodThis method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
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bought yesterday, as they are all mixed together.So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
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Weighted Average Method Here the average cost is applied i.e. after every purchase anaverage cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
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advantage due to that expenditure. It is usually incurred for accusation of an asset. Theseexpenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
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or machinery Expenditure incurred in connection with the purchase of a fixed asset. Forexample, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
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Buy a car is capital expenditure because its benefit to the business will be spread over along time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
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either by owner or shareholder of the business? or from sale of fixed assets of thebusiness.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
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f. Deferred Revenues : Payments received in advance of services performed or goods beingdelivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
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year being reported on.87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
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89. Audit Report: A report issued by an independent CPA that expresses some opinionabout the financial statements the report is attached to.
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90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
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91. Dividend: A portion of the company's profits paid to common and/or preferredshareholders. Dividends represent profits that are not reinvested by the corporation.
92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
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9 3 . Holding company: A corporation that holds a majority of the shares outstanding of asubsidiary company
94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
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manager has had so much information about a debtor company's financial condition, plans,goals, short?term and long?term strategy, and the competitive environment in which it
operates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
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publicly traded companies c [ ompanies selling stocks and/ or bonds] .96. Face Value: The stated value of a bond certificate.
97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
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98. Fair Market Value: The market value of an asset as determined by supply and demand99. Earnings per share: Earnings stated as a dollar value per share of stock.
100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
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statement, and cash?flow statement as well as notes to the financial statements and theauditor's opinion letter. Financial statements report the financial status and results of
operations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
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Financial statements that report the combined operating results of two or more legallyseparate entities ? such as a parent company and its wholly owned subsidiary.
103. Interim financial statements: Financial statements for periods of less than one year.
1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
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presented.105. The Objective Evidence Requirement: The requirement involves the fact that
financial statements must be based on hard evidence and documentation that reasonable
people would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
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system that is used extensively in business and industry, government, and nonprofitorganizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
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strategic non?financial performance measures to traditional financial metrics to givemanagers and executives a more 'balanced' view of organizational performance.
107. Balanced scorecard methodology is an analysis technique designed to translate an
organization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
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108. Human Resource Accounting is the process of identifying and reporting theInvestments made in the Human Resources of an Organisation that are presently not
accounted for in the conventional accounting practices.
109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
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this objective taxpayer may resort to following Three Methods:o Tax Planning
o Tax Avoidance
o Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
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exemptions, deductions and rebates provided in Act. The Income Tax lawitself provides for various methods for Tax Planning, Generally it is provided under
exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief?s. Some of the
provisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
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exempt from tax.o Exemptions u/s 10A, 10B, and 10BA
o Residential Status of the person
o Choice of accounting system
o Choice of organization.
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1o
For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.
o
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Where a person buys machinery instead of hiring it, he is availing the benefit ofdepreciation. If is his exclusive right either to buy or lease it . In the same manner to
choice the form of organization, capital structure, buys or make products are the
assessee ? s exclusive right. One may look for various tax incentives in the above said
transactions provided in this Act, for reduction of tax liability. All this transaction
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involves tax planning.b. Tax Evasion : An illegal practice where a person, organization or corporation
intentionally avoids paying his/her/its true tax liability. Those caught evading taxes
are generally subject to criminal charges and substantial penalties.
There is a difference between tax minimization/avoidance and tax evasion. All citizens have
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the right to reduce the amount of taxes they pay as long as it is by legal means.c. Tax avoidance : The use of legal methods to modify an individual's financial situation
in order to lower the amount of income tax owed. This is generally accomplished by
claiming the permissible deductions and credits. This practice differs from tax
evasion, which is illegal.
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Most taxpayers use some forms of tax avoidance. For example, individuals who contribute toemployer?sponsored retirement plans with pre?tax funds are engaging in tax avoidance
because the amount of taxes paid on the funds when they are withdrawn is usually less than
the amount that the individual would owe today. Furthermore, retirement plans allow
taxpayers to defer paying taxes until a much later date, which allows their savings to grow at
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a faster rate.110. Indian Accounting Standards , (abbreviated as India AS) are a set of accounting
standards notified by the Ministry of Corporate Affairs which are converged with
International Financial Reporting Standards (IFRS). These accounting standards are
formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
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111. GAAP: Generally Accepted Accounting Principles define appropriate accountingpractices for CP As and other accountants.
112. FASB: The Financial Accounting Standards Board is a private organization that
established Generally Accepted Accounting Principles.
113. Qualified opinion: An opinion of an independent auditor in which the auditor states the
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company did not follow GAAP, and/or did not allow the auditor to perform an auditnecessary to offer an Unqualified Opinion letter.
114. Disclaimer of opinion: A statement by an auditor that he or she was unable to satisfy
the requirement that the financial statements presented followed GAAP.
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Department of Business ManagementCONCEPTS IN FINANCIAL ACCOUNTING AND ANALYSIS
1. Financial accountancy (or financial accounting) is the field of accountancy concerned
with the preparation of financial statements for decision makers, such as stockholders,
,suppliers, banks, employees, government agencies, owners, and other stakeholders.
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Financial capital maintenance can be measured in either nominal monetary units or units ofconstant purchasing power.
2. Accounting method: The technique used to report sales, expenses, and profits.
Accounting methods include "cash basis" accounting and "accrual basis" accounting.
Accounting Cycle: The sequence of six steps in the processing of financial transactions (from
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the time they occur to their inclusion in financial statements) pertaining to an accountingperiod.
These steps are: (1) analyzing the transactions as they occur, (2) recording them in
the journals, (3) posting debits and credits from journal entries to the general ledger,
(4) adjusting the assets with a trial balance, (5) preparing financial statements, and
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(6) closing the temporary account.3. The basic accounting equation, also called the balance sheet equation, represents the
relationship between the assets, liabilities, and owner's equity of a business. It is the
foundation for the double?entry bookkeeping system. For each transaction, the total debits
equal the total credits. It can be expressed as
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4. Suspense A/C: The account opened to rectify the previous year's one?sided errors is calledsuspense account. Suspense account is opened for a temporarily period only. Suspense
account shows no balance after rectification of all errors and it disappears automatically.
5. Accounts receivable turnover: A method used to determine a company's average
collection period for receivables. The formula is net sales divided by average accounts
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receivable.6. Accrual basis of accounting: An accounting system in which revenues are recognized
when earned, regardless of when the cash is actually received. Similarly, expenses are
recognized when they are incurred, regardless of when the expenses are paid.
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7. Accruals: Moneys accumulated but not yet due and payable. Examples include taxes andwages. (Accrue means to accumulate.)
8. Cash or Accrual Basis accounting: A company will select one method or the other and
apply it consistently.
9. Amortization: A process of cost allocation? a process of gradually reducing the value of
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an intangible asset over time by allocating a cost of the asset to the accounting periods itbenefits.
10. Double Entry Accounting: A method of recording accounting transactions to maintain
the equality of the accounting equation.
11. Fiscal year: Any continuous 12 month accounting period used by a company as its
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accounting year.12. Full Disclosure Requirement: This is a requirement that a company disclose all facts
and information that are relevant to readers of financial statements including standard reports
and schedules, including footnotes.
13. Consistency Principle: It states that companies must use the same accounting method
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from period to period, and that in the event that a company elects to change certainaccounting methods, that fact along with an analysis of the impact of that accounting change
must be reported on the financial statements in footnotes.
14. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
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company, that information will be reflected in its opinion letter.15. Going Concern: The accounting concept that an company will have a continuing
existence for the foreseeable future. If the auditor has a questions about the viability of the
company, that information will be reflected in its opinion letter.
16. Conservatism Principle: This principle states that given a choice of options an
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independent accountant must select an accounting method that has the least favorable impacton the net income of the company being audited.
17. Matching principle: The accounting principle that states that revenues must be matched
with the expenses required to generate those revenues in order to accurately present net
income for an accounting period.
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18. Materiality: The principle that only items that are of sufficient size to be relevant to thereader of a company's financial statements will be included in the financial statements and
footnotes
19. Corporation: A legal entity chartered by a state. Ownership of a corporation is
represented by stock.
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20. Balance sheet: A financial statement that lists a company's assets, liabilities, and owners'equity on a particular date.
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2 1 . Total assets: All current assets, fixed assets, and other assets.
22. Total liabilities: All current liabilities and long?term debt.
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23. Classified balance sheet: A balance sheet in which assets and liabilities are divided intocurrent and non?current.
24. Assets: Economic resources owned or controlled by the company.
25. Liabilities: Debt owed by a company.
26. Liquid assets: Current assets minus inventory? also called Quick assets.
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27. Fixed assets: Tangible assets such as property, plant, and equipment with a useful life ofmore than one year.
28.Tangible asset: Tangible assets include property, plant, and equipment.
29. Intangible assets: Assets (such as goodwill) with no tangible, physical characteristics
that are of monetary value.
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30. Goodwill: The difference between the acquisition cost of an asset and the fair marketvalue or book value of an asset.
31. Contingent liabilities: Typically identified in the notes to the financial statements,
contingent liabilities are indefinite as to time or cost but represent a potential obligation.
Example: A corporation is being sued for product negligence, and the outcome of that
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lawsuit is unknown.32. Liquidity: The ability to sell assets to generate cash to pay debts.
33. Solvency: A somewhat subjective measure of a business entity's ability to meet its short
term and long term financial obligations
34. Current assets: The sum of cash, accounts receivable, notes receivable, and inventories.
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Current assets include cash and any other asset that is expected to be converted into cash inthe ordinary course of business within one year.
35. Current liabilities: The sum of all money owed by the company that is payable within
one year, or the current operating cycle.
36. Current Ratio: A measure of the liquidity of a business? it is a company's assets divided
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by current liabilities.37. Quick assets: Current assets minus inventory? also called Liquid assets.
38. Quick Ratio: A measure of a company's liquidity. The formula for calculating the quick
ratio is: Cash + cash equivalents + marketable securities + accounts receivable+ notes
receivable Divided by Current liabilities.
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339. Accounts receivable: Money due for services performed or goods delivered on open
account terms. Accounts receivable pledged as collateral would be footnoted on the financial
statements. Accounts receivable is normally stated net of an allowance for uncollectable
accounts.
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40. Inventory: Inventory includes raw materials, work in progress, and finished goodsinventory.
41. Cash equivalents: Short term, highly liquid investments held in place of cash and readily
convertible into cash
42. Prepaid expenses: Involves cash paid in advance for goods or services that have not yet
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been delivered or received.43. Bad debt: An uncollectible accounts receivable balance.
44. Interest coverage: Interest coverage is defined as earnings before interest and taxes
divided by interest expense.
45. Inventory turnover: Defined as the cost of goods sold for an accounting period divided
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by the average inventory value for that period.46. Price? to?earnings ratio: The P /E ratio is the market value of a common stock divided
by the earnings per share of common stock for the fiscal year end. A high price?to?earnings ratio
might mean the company stock is overvalued. On the other hand, a high price?to?earnings ratio
might also indicate that stockholders expect the company to be even more successful in the near
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future than it is today.47. Working capital: Current assets minus current liabilities. Working capital is the amount
of cash a company expects to generate in the short term and have available to retire current
liabilities
48. Cash Flow statement : Statement of Cash Flows: A financial report showing a business
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entities cash inflows and its cash outflows during an accounting period.Cash flow statements signify the changes in the cash and cash equivalents of the business due
to the business operations in one time period. The statement of cash flows uses information
from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows
and outflows.
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A Cash Flow Statement comprises information on following 3 activities:v' Operating A ctivities
v' InvestingA ctivities
v' F inancing A ctivities
a. Operating Activities
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Operating activities include cash flows from all standard business operations. Cash receiptsfrom selling goods and services represent the inflows. The revenues from interest and
dividends are also included here. The operational expenditures are considered as outflows for
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this section. Although interest expenses fall under this section but the dividends are not
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included .Dividends are considered as a part of financing activity in financial accountingterms.
b. Investing Activities
Investing activities include transactions with assets, marketable securities and credit
instruments. The sale of property, plant and equipment or marketable securities is a cash
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inflow. Purchasing property, plant and equipment or marketable securities are considered ascash outflows. Loans made to borrowers for long?term use is another cash outflow.
Collections from these loans, however, are cash inflows.
c. Financing Activities
Financing activities on the statement of cash flows are much more defined in nature. The
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receipts come from borrowing money or issuing stock. The outflows occur when a companyrepays loans, purchases treasury stock or pays dividends to stockholders. As the case with
other activities on the statement of cash flows depend on activities rather than actual general
ledger accounts.
49. Funds flow statement : Funds flow statements report changes in a business's working
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capital from its operations in a single time period, but have largely been superseded by cashflow statements.
50. Book value: A calculation done by dividing equity of common shares, as listed in the
equity section of the balance sheet, by the number of shares of common stock outstanding.
51. Common stock: Common stock represents a claim on the assets of a corporation by
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common stockholders after all debts and other obligations have been paid in full. Commonstock shares give the investor a vote on matters including the election of the company's
directors. Common stockholders bear the ultimate risk of loss in liquidation since their claim
is subordinated to all other claims and classes of claims.
52. Preferred stock: A class of stock which typically is without voting rights, but which
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carries a specific, stated dividend rate and a priority over com?mon stock in dividendpayments and in the event of asset liquidation.
53. Stock: Ownership claims on the assets of a business after all creditors have been paid.
Stockholder: A person or company that owns one or more share of stock in a company.
54. Stock dividends: Dividends payable in the form of stock.
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55. Bonds: Corporate bonds are debts instruments issued with an initial maturity of morethan one year. A bond is a debt security that represents an obligation of the issuer to pay
interest to the creditor and to repay the principal at maturity.
56. Convertible bonds: Bonds that can be converted into stock at the option of the owner
after a specified period of time.
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557. Corporate bonds: Bonds that are issued by a corporation and represent a debt owed by a
corporation to the bondholder. They typically include an interest rate as well as a specific
maturity date. Bonds do not convey any ownership rights to the holder. Bonds are, in effect,
an IOU issued by a corporation.
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58. Long?term debt: Any liabilities that are not current liabilities. Long term liabilities duein more than one year.
59. Debenture: A debenture is a bond issued by a corporation that is not backed by the
pledge of collateral such as one or more tangible assets of the issuer.
60. Retained earnings: Profits that have not been distributed in the form of dividends to
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stockholders. Specifically, retained earnings represent the cumulative amount of net profitsnot paid by a corporation to its stockholders in the form of dividends.
61. Net worth: Assets minus liabilities equals net worth.
62. Note payable: A debt? a short?term obligation evidenced by a contract such as a
promissory note.
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63. Accounts payable: Money owed to suppliers of goods and services delivered on openaccount terms and other resources.
64. Treasury stock: Shares of a company's stock issued, sold and then repurchased by the
company in a buy?back.
65. Unearned revenues: Moneys received before they have actually been earned.
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66. Unsecured Debt: An obligation of a company of corporation not backed by any specificcollateral.
67. Commercial Paper: A short term debt represented by a note issued by a corporation
with a good to excellent credit rating to raise cash quickly. Typically, commercial paper
matures is a little as a week and as many as 270 days.
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68. Warrants: Warrants are long?term options to buy stock at a stated price. Warrants areoften issued to key personnel as a type of bonus. In many companies, warrants are used as a
retention incentive or bonus.
69. P & L: Acronym for Profit and Loss Statement / Income Statement.
70. Income statement: A document reporting revenues, expenses, and net income (or net
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loss).71. Cost of goods sold: The expenses incurred to purchase or to manufacture the goods sold
during an accounting period
72. Net Income: Net income is income after tax has been paid but before payment of
preferred stock and/ or common stock dividends.
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73. Net sales: Gross sales (total sales) minus sales returns and allowances.6
74. Expenses: The costs incurred in the normal course of business to generate revenues and
profits.
75. Discretionary expenses: Expenses under the control of management with respect to
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timing.76. Gross profit margin: Gross margin is defined as net sales minus the cost of goods sold.
77. Gross sales: Sales before deducting for any sales returns or allowances.
78. EBIT: Earnings before interest and taxes paid.
79. Extraordinary items: Non?operating gains or losses that is infrequent in occurrence.
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80. Depreciation: The reduction in value of a capital asset over time, specifically allocationof the cost of the asset over the useful life of that asset.
In Accountancy, depreciation refers to two aspects of the same concept: the decrease in
value of assets (fair value depreciation), and the allocation of the cost of assets to periods in
which the assets are used (depreciation with the matching principle). The former affects the
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balance sheet of a business or entity, and the latter affects the net income that they report.a. Straight? line: This method spreads the cost of the fixed asset evenly over its useful
life. An accounting procedure in which the value of assets is depreciated evenly over the
useful life of the asset. Subsequent events are significant events from an accounting
perspective that occur after the balance sheet date, but before the financial statements are
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issued. Subsidiary: A company or a corporation that is owned and controlled by another.b. Declining?balance: An accelerated method of depreciation, it results in higher
depreciation expense in the earlier years of ownership.
c. Sum?of? the?years? digits: Compute depreciation expense by adding all years of the fixed
asset?s expected useful life and factoring in which year you are currently in, as compared
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to the total number of years.d. Sinking fund method: A technique for depreciating an asset in bookkeeping records
while also generating money to purchase a replacement for the asset when it reaches the end
of its useful life. Under the sinking fund method, the business sets aside an amount of money
to invest annually so that the principal plus the interest earned in the fund will be enough to
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replace the asset. The amount of money that needs to be added to the asset?replacement fundeach year is calculated by determining how much it will cost to replace the asset, how many
years the asset is expected to last and what rate of interest can be earned as well as how much
can be earned through the effects of compound interest. The sinking fund method is not
common, and is not desirable when interest rates cannot reasonably be predicted.
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81. Historical cost: Most assets are recorded at their historical cost less accumulateddepreciation. As a result, the value of an asset as recorded on the balance sheet may have
little in common with the market value of that asset.
82. Book value of a depreciable asset: The historical or acquisition cost of a depreciable
asset minus the accumulated depreciation on that asset.
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783 . Accumulated Depreciation: The total depreciation recorded against an asset since its
acquisition.
84. Inventory valuation: A inventory valuation is a statement which provides information
about the value of goods held in inventory. There are a number of ways to perform
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an inventory valuation and different approaches to maintaining records about inventory.a. The First1?In?First?Out Method(FIFO )
A method of calculating the cost of inventory in which the first goods purchased are assumed
to be the first goods sold This method assumes that the first inventories bought are
the first ones to be sold, and that inventories bought later are sold later. It is very common to
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use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life,because the oldest goods need to be sold before they pass their sell?by date. First?in, First?out
(FIFO) Method Here it is assumed that the stock received first is consumed/sold first. Hence
the stock at hand at the end of the year is from the latest purchase. 1st in 1st out.
First?in, First?out (FIFO) Method In case of rising prices, this may lead to overvaluation of
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stocks and overstatement of profits and in case of falling prices this method leads tounderstatement of stock and profits. 2nd 3rd etc. 1 st in 1 st out.
Thus the first?in?first?out method is probably the most commonly used method in small
business.
b. The Last?In?First?Out Method(LIFO)
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LIFO: A method of valuing inventory in which the last goods purchased are assumed to bethe first goods sold.
This method assumes that the last inventories bought are the first ones to be sold, and that
inventories bought first are sold last.
The LIFO method is commonly used in the U.S.A.
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d. The Weighted Average Cost MethodThis method assumes that we sell all our inventories simultaneously.
The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
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bought yesterday, as they are all mixed together.So we work out an average cost for all chemicals that we have in our possession. The method
specifically involves working out an average cost per unit at each point in time after a
purchase.
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Weighted Average Method Here the average cost is applied i.e. after every purchase anaverage cost is computed from the cost of purchases and the cost of stock. This method tries
to even out the effects of price fluctuations
85. Capital and Revenue Receipts and Expenditures:
a. Capital Expenditure: Capital expenditure occurs when a business gets a long term
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advantage due to that expenditure. It is usually incurred for accusation of an asset. Theseexpenditures do not occur in the regular day to day transactions of the business. OR An
expenditure that is recorded as an asset because the asset purchased is expected to be in use
beyond the current accounting period.
Common examples: Purchase of furniture, office building etc.Purchase of additional furniture
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or machinery Expenditure incurred in connection with the purchase of a fixed asset. Forexample, carriage paid of machinery purchased. Purchase of patent right, copy rights etc.
b. Revenue Expenditure : Expenditure which is not for increasing the value of fixed assets,
but for running the business on a day to day basis, is known as revenue expenditure.
c. Difference between Capital and Revenue expenditure:
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Buy a car is capital expenditure because its benefit to the business will be spread over along time.
Fuel cost for running this care is revenue expenditure and it will be used up in few days
and does not add to the value of the fixed asset.
d. Capital receipts: Capital receipts consist of additional payments made to the business
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either by owner or shareholder of the business? or from sale of fixed assets of thebusiness.
e. Revenue receipts : Any receipt in the normal running or through day to day transactions
of the business is categorized as Revenue receipt. Sales receipts of the business are
revenue receipts.
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f. Deferred Revenues : Payments received in advance of services performed or goods beingdelivered.
86. Financial report: A report prepared by public companies at the end of the company's
fiscal year describing the financial performance of the company? the financial report includes
a significant amount of narrative about the successes (or failures) of the company in the fiscal
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year being reported on.87. Annual Report: A written report to shareholders detailing and summarizing the prior
fiscal year's financial performance
88. Audit: An examination of the financial performance and the financial status of a
company performed by an independent accountant or by a CPA.
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89. Audit Report: A report issued by an independent CPA that expresses some opinionabout the financial statements the report is attached to.
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90. Board of Directors: Individuals elected by the board of directors to oversee the
managers and offer guidance to a corporation
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91. Dividend: A portion of the company's profits paid to common and/or preferredshareholders. Dividends represent profits that are not reinvested by the corporation.
92. Parent company: A company that owns or controls a separate legal entity. Generally, a
parent company owns more than 50% of the outstanding stock? but not necessarily 100% of
it .
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9 3 . Holding company: A corporation that holds a majority of the shares outstanding of asubsidiary company
94. Prospectus: A document describing a stock offering by a corporation. A prospectus
contains a wealth of information about a company. If the prospectus relates to an initial
public offering, the information contained in the prospectus might be the first time a credit
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manager has had so much information about a debtor company's financial condition, plans,goals, short?term and long?term strategy, and the competitive environment in which it
operates.
95. Securities and Exchange Commission: The SEC is a government entity responsible for
regulating the securities markets and for monitoring and regulating the financial reporting of
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publicly traded companies c [ ompanies selling stocks and/ or bonds] .96. Face Value: The stated value of a bond certificate.
97. Par value: Par value is the face value of a security instrument. Par value is a stated value
below which the corporation will never sell the stock. Par value is typically set quite low? for
example, a par value of from one cent to one dollar per share is not uncommon.
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98. Fair Market Value: The market value of an asset as determined by supply and demand99. Earnings per share: Earnings stated as a dollar value per share of stock.
100. Equity Financing: The process of acquiring funds for a corporation in the form of
additional investments by owners.
101. Financial statements: These statements typically include the balance sheet, income
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statement, and cash?flow statement as well as notes to the financial statements and theauditor's opinion letter. Financial statements report the financial status and results of
operations of a business entity.
102. Comparative financial statements: Statements in which two or more years of financial
results are shown together for the purpose of comparison. Consolidated financial statements:
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Financial statements that report the combined operating results of two or more legallyseparate entities ? such as a parent company and its wholly owned subsidiary.
103. Interim financial statements: Financial statements for periods of less than one year.
1 04. Notes to financial statements: Narrative information intended to be an integral part of
the financial statements and necessary for a comprehensive review of the statements
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presented.105. The Objective Evidence Requirement: The requirement involves the fact that
financial statements must be based on hard evidence and documentation that reasonable
people would interpret in similar ways.
106. Balanced Scorecard : The balanced scorecard is a strategic planning and management
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system that is used extensively in business and industry, government, and nonprofitorganizations worldwide to align business activities to the vision and strategy of the
organization, improve internal and external communications, and monitor organization
performance against strategic goals. It was originated by Drs. Robert Kaplan (Harvard
Business School) and David Norton as a performance measurement framework that added
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strategic non?financial performance measures to traditional financial metrics to givemanagers and executives a more 'balanced' view of organizational performance.
107. Balanced scorecard methodology is an analysis technique designed to translate an
organization's mission statement and overall business strategy into specific, quantifiable
goals and to monitor the organization's performance in terms of achieving these goals.
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108. Human Resource Accounting is the process of identifying and reporting theInvestments made in the Human Resources of an Organisation that are presently not
accounted for in the conventional accounting practices.
109. Tax Planning:
Introduction: The avid goal of every taxpayer is to minimize his Tax Liability. To achieve
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this objective taxpayer may resort to following Three Methods:o Tax Planning
o Tax Avoidance
o Tax Evasion
a. Meaning of Tax planning: Planning involves planning in order to avail all
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exemptions, deductions and rebates provided in Act. The Income Tax lawitself provides for various methods for Tax Planning, Generally it is provided under
exemptions u/s 10, deductions u/s 80C to 80U and rebates and relief?s. Some of the
provisions are enumerated below:
o Investment in securities provided u/s 10(15) . Interest on such securities is fully
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exempt from tax.o Exemptions u/s 10A, 10B, and 10BA
o Residential Status of the person
o Choice of accounting system
o Choice of organization.
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1o
For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.
o
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Where a person buys machinery instead of hiring it, he is availing the benefit ofdepreciation. If is his exclusive right either to buy or lease it . In the same manner to
choice the form of organization, capital structure, buys or make products are the
assessee ? s exclusive right. One may look for various tax incentives in the above said
transactions provided in this Act, for reduction of tax liability. All this transaction
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involves tax planning.b. Tax Evasion : An illegal practice where a person, organization or corporation
intentionally avoids paying his/her/its true tax liability. Those caught evading taxes
are generally subject to criminal charges and substantial penalties.
There is a difference between tax minimization/avoidance and tax evasion. All citizens have
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the right to reduce the amount of taxes they pay as long as it is by legal means.c. Tax avoidance : The use of legal methods to modify an individual's financial situation
in order to lower the amount of income tax owed. This is generally accomplished by
claiming the permissible deductions and credits. This practice differs from tax
evasion, which is illegal.
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Most taxpayers use some forms of tax avoidance. For example, individuals who contribute toemployer?sponsored retirement plans with pre?tax funds are engaging in tax avoidance
because the amount of taxes paid on the funds when they are withdrawn is usually less than
the amount that the individual would owe today. Furthermore, retirement plans allow
taxpayers to defer paying taxes until a much later date, which allows their savings to grow at
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a faster rate.110. Indian Accounting Standards , (abbreviated as India AS) are a set of accounting
standards notified by the Ministry of Corporate Affairs which are converged with
International Financial Reporting Standards (IFRS). These accounting standards are
formulated by Accounting Standards Board of Institute of Chartered Accountants of India.
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111. GAAP: Generally Accepted Accounting Principles define appropriate accountingpractices for CP As and other accountants.
112. FASB: The Financial Accounting Standards Board is a private organization that
established Generally Accepted Accounting Principles.
113. Qualified opinion: An opinion of an independent auditor in which the auditor states the
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company did not follow GAAP, and/or did not allow the auditor to perform an auditnecessary to offer an Unqualified Opinion letter.
114. Disclaimer of opinion: A statement by an auditor that he or she was unable to satisfy
the requirement that the financial statements presented followed GAAP.
1 1 5. Hedging: The process of lowering risk by purchasing a security or another product that
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has the effect of offsetting an undesirable risk characteristic.116. Lease: A contract that specifies for how long, for what cost, and under what terms and
conditions the owner of an asset [the lessor] agrees to transfer the right to use the asset to
another party t[he lessee].
117. Capital lease: A lease that is, in effect, a purchase made by the lessee. The leased
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property is reported on the balance sheet. The lessee treats the transaction like a purchase ofthe leased property.
118. Break?even analysis: A calculation to determine the level of sales at which the
company will break even?the point at which net income is zero.
119. Depletion: The process of cost allocation on a non?renewable natural resource.
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120. Leverage: A company is said to be leveraged if it has an abnormally high debt to equityratio. Leverage is positive to the extent that the money borrowed generated more income than
is required to repay the debt and to justify the higher interest costs.
121. Exchange rate: The value of one currency in terms of another currency.
122. Liquidation: The process of dissolving a business and selling the assets of the business
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in order to pay the company's debts.FirstRanker.com - FirstRanker's Choice