MGT101 Glossary for Midterm Exam Preparation



MGT101 Financial Accounting
Glossary for Midterm Exam Preparation Must Read Before Exam

accounting cycle :
The procedures for analyzing, recording, classifying, summarizing, and reporting the transactions of a business.
account payable :
An amount owed to a supplier for good or services purchased on credit; payment is due within a short time period, usually 30 days or less.
acid-test ratio (or quick ratio) :
A measure of a firm's ability to meet current liabilities; more restrictive than the current ratio, it is computed by dividing net quick assets (all current assets, except inventories and prepaid expenses) by current liabilities.
bad debt :
An uncollectible account receivable.
Deferred Income Taxes :
An account used to record the difference between income tax expense on the income statement and income taxes payable for the year to federal and state governments.
dividend payment date :
The date on which a corporation pays dividends to its shareholders.
double-entry accounting :
A system of recording transactions in a way that maintains the equality of the accounting equation.
drawings account :
The account used to reflect periodic withdrawals of earnings by the owner (proprietor) or owners (partners) of a proprietorship or partnership.
effective-interest amortization :
A method of systematically writing off a bond premium or discount that takes into consideration the time value of money and results in an equal rate of amortization for each period.
Financial Accounting Standards Board (FASB) :
The private organization responsible for establishing the standards for financial accounting and reporting in the United States.
FOB (free-on-board) destination :
A business term meaning that the seller of merchandise bears the shipping costs and maintains ownership until the merchandise
accrued expenses :
Expenses that arise through adjusting entries when accounting for unrecorded expenses.


adjusted gross income :
An individual taxpayer's total income minus deductions (adjustments) for individual retirement plan contributions and alimony paid.
adjustments to gross income :
Amounts deducted from the gross income of an individual taxpayer in arriving at adjusted gross income; includes contributions to individual retirement plans and alimony paid.
adverse opinion :
Audit report indicating the auditor believes the overall financial statements are so materially misstated or misleading that the statements do not fairly represent the financial position or results of the operations and cash flows.
aging accounts receivable :
The process of categorizing each account receivable by the number of days it has been outstanding.
Allowance for Uncollectible Accounts :
A contra account, deducted from Accounts Receivable, that shows the estimated losses from uncollectible accounts.
annuity :
A series of equal amounts to be received or paid at the end of equal time intervals.
assets :
Economic resources that are owned or controlled by an entity.
balance sheet (statement of financial position) :
The financial statement that shows the assets, liabilities, and owners' equity of an entity at a particular date.
bank reconciliation :
The process of systematically comparing the cash balance as reported by the bank with the cash balance on the company's books and explaining any differences.
board of directors :
Individuals elected by the stockholders to govern a corporation.
bond :
A contract between a borrower and a lender in which the borrower promises to pay a specified rate of interest for each period the bond is outstanding and repay the principal at the maturity date.
bond discount :
The difference between the face value and the sales price when bonds are sold below their face value.


business expenses :
Expenses that have been paid or incurred in the course of business and that are ordinary, necessary, and reasonable in amount

calendar year :
An entity's reporting year, covering 12 months and ending on December 31.
capital gain :
The excess of the selling price over the cost basis when assets, such as securities and other personal and investment assets, are sold.

capital stock :
The portion of a corporation's owners' equity contributed by investors (owners) in exchange for shares of stock.
cash :
Coins, currency, money orders, checks, and funds on deposit with financial institutions; the most liquid of assets.
cash-basis accounting :
A system of accounting in which transactions are recorded and revenues and expenses are recognized only when cash is received or paid.
cash equivalents :
Short-term, highly liquid investments that can be converted easily into cash.
cash outflows :
The initial cost and other expected outlays associated with an investment.
cash receipts journal :
A special journal in which all cash received, from sales, interest, rent, or other sources, is recorded.
classified balance sheet :
A balance sheet in which assets and liabilities are subdivided into current and noncurrent categories.
code of professional ethics :
Rules set by the AICPA's Committee on Professional Ethics, which govern the conduct of CPAs.
comparative financial statements :
Financial statements in which data for two or more years are shown together.


consignment :
An arrangement whereby merchandise owned by one party (the consignor) is sold by another party (the consignee), usually on a commission basis.
consignor :
The owner of merchandise to be sold by someone else, known as the consignee.
contributed capital :
The portion of owners' equity contributed by investors (the owners) in exchange for shares of stock.
control account :
A summary account in the General Ledger that is supported by detailed individual accounts in a subsidiary ledger.
convertible bonds :
Bonds that can be traded for, or converted to, other securities after a specified period of time.
cost method of accounting for investments in stock :
Method used to account for an investment in the stock of another company when less than 20 percent of the outstanding voting stock is owned.
cost of goods sold :
The expense incurred to purchase or manufacture the merchandise sold during a period.
credit card draft :
The part of the multiple-page credit form that is sent by the retailer to the credit card company for reimbursement of the stated amount.
cumulative-dividend preference :
The rights of preferred stockholders to receive current dividends plus all dividends in arrears before common stockholders receive any dividends. current assets: Cash and other assets that may reasonably be expected to beconverted to cash within a year or during the normal operating cycle.
current-dividend preference :
The right of preferred shareholders to receive current dividends before common shareholders receive dividends.

date of record :
The date selected by a corporation's board of directors on which the shareholders of record are identified as those who will receive dividends.
debt financing :
Acquiring funds by borrowing money from creditors in the form of long-term notes, mortgages, leases, or bonds.
declaration date :
The date on which a corporation's board of directors formally decides to pay a dividend to shareholders.
depreciation :
The process of cost allocation that assigns the original cost of plant and equipment to the periods benefited.
discounting a note receivable :
The process of the payee's selling notes to financial institution for less than the maturity value.
diversified companies :
Companies operating in more than one line of business.
dividends in arrears :
Missed dividends for past years that preferred stockholders have a right to receive under the cumulative-dividend preference if and when dividends are declared.
EDP (electronic data processing) :
A term referring to the use of computers in recording, classifying, manipulating, and summarizing data.
entity :
An organizational unit (a person, partnership, or corporation) for which accounting records are kept and about which accounting reports are prepared.
equity financing :
Acquiring funds in the form of investments by owners (proprietor, partner, or stockholder).
exchange gain or loss :
The gain or loss incurred when the exchange rates are different on the purchase and payment dates or on the sale and receipt of payment dates.



financing activities :
Transactions and events whereby resources are obtained from, or repaid to, owners (equity financing) and creditors (debt financing).
floor :
The minimum market amount at which inventory can be carried on the books; equal to net realizable value minus a normal profit.
Foreign Corrupt Practices Act (FCPA) :
Legislation requiring any company that has publicly-traded stock to maintain records that accurately and fairly represent the company's transactions; additionally, requires any publicly-traded company to have an adequate system of internal accounting controls.
GAAS (generally accepted auditing standards) :
Auditing standards developed by the AICPA.
generally accepted auditing standards (GAAS) :
Auditing standards developed by the AICPA.
general-purpose financial statements :
The financial reports intended for use by a variety of external groups; they include the balance sheet, the income statement, and the statement of cash flows.
goodwill :
An intangible asset that exists when a business is valued at more than the fair market value of its net assets, usually due to strategic location, reputation, good customer relations, or similar factors; equal to the excess of the purchase price over the fair market value of the net assets purchased.
gross income :
The taxable portion of a taxpayer's gross receipts



account :
An accounting record in which the results of transactions are accumulated; shows increases, decreases, and a balance.
accounting :
A service activity designed to accumulate, measure, and communicate financial information about economic entities for decision-making purposes.


accounting model :
The basic accounting assumptions, concepts, principles, and procedures that determine the manner of recording, measuring, and reporting an entity's transactions.
accounting system :
The set of manual and computerized procedures and controls that provide for identifying relevant transactions or events; preparing accurate source documents, entering data into the accounting records accurately, processing transactionsaccurately, updating master files properly, and generating accurate documents and reports.
account receivable turnover :
A measure used to determine a company's average collection period for receivables; computed by dividing net sales (or net credit sales) by average accounts receivable.
accrual-basis accounting :
A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid.
adjusting entries :
Entries required at the end of each accounting period to recognize, on an accrual basis, revenues and expenses for the period and to report proper amounts for asset, liability, and owners' equity accounts.
amortization :
The process of cost allocation that assigns the original cost of an intangible asset to the periods benefited.
annual report :
A document that summarizes the results of operations and financial status of a company for the past year and outlines plans for the future.
arm's-length transactions :
Business dealings between independent and rational parties who are looking out for their own interests.
articulation :
The interrelationships among the financial statements.
asset turnover ratio :
An overall measure of how effectively assets are used during a period; computed by dividing net sales by average total assets.
audit report :
A report issued by an independent CPA that expresses an opinion about whether the financial statements present fairly a company's financial position, operating results, and cash flows in accordance with generally accepted accounting principles.
authorized stock :
The amount and type of stock that may be issued by a company, as specified in its articles of incorporation.
available-for-sale securities :
Debt and equity securities not classified as trading, held-to-maturity, or equity method securities



bond maturity date :
The date at which a bond principal or face amount becomes payable.
bond premium :
The difference between the face value and the sales price when bonds are sold above their face value.
book value :
The net amount shown in the accounts for an asset, liability, or owners' equity item.
book value per share :
A measure of net worth; computed by dividing stockholders' equity for each class of stock by the number of shares outstanding for that class.
business :
An organization operated with the objective of making a profit from the sale of goods or services.
callable bonds :
Bonds for which the issuer reserves the right to pay the obligation before its maturity date.
capital account :
An account in which a proprietor's or partner's interest in a firm is recorded; it is increased by owner investments and net income and decreased by withdrawals and net losses.
cash disbursements journal :
A special journal in which all cash paid out for supplies, merchandise, salaries, and other items is recorded.
cash over and short :
An account used to record overages and shortages in petty cash.
ceiling :
The maximum market amount at which inventory can be carried on the books; equal to net realizable value.
chart of accounts :
A systematic listing of all accounts used by a company.
charter (articles of incorporation) :
A document issued by a state that gives legal status to a corporation and details its specific rights, including the authority to issue a certain maximum number of shares of stock.
closed transaction :
A transaction that is completed within the accounting period; both the purchase and payment or sale and receipt of payment occur within the same accounting period.
compound journal entry :
A journal entry that involves more than one debit or more than one credit or both.
conduit principle :
The idea that all income earned by an entity must be passed through to the owners and reported on their individual tax returns; applicable to proprietorships, partnerships, and S corporations.
consignee :
A vendor who sells merchandise owned by another party, known as the consignor, usually on a commission basis.
consolidated financial statements :
Statements that report the combined operating results, financial position, and cash flows of two or more legally separate but affiliated companies as if they were one economic entity.
contra account :
An account that is offset or deducted from another account.
corporation :
A legal entity chartered by a state; ownership is represented by transferable shares of stock.
coupon bonds :
Unregistered bonds for which owners receive periodic interest payments by clipping a coupon from the bond and sending it to the issuer as evidence of ownership.
current (or working capital) ratio :
A measure of the liquidity of a business; equal to current assets divided by current liabilities.
debentures (unsecured bonds) :
Bonds for which no collateral has been pledged.
debt securities :
Financial instruments issued by a company that carry with them a promise of interest payments and the repayment of principal.


deduction :
Business expenses or losses that are subtracted from gross income in computing taxable income.
direct method :
A method of reporting net cash flow from operations that shows the major classes of cash receipts and payments for a period of time.
direct write-off method :
The recording of actual losses from uncollectible accounts as expenses during the period in which accounts receivable are determined to be uncollectible.
disclaimer of opinion :
A disclaimer indicating the auditor was unable to satisfy himself or herself that the overall financial statements were fairly present in accordance with GAAP.
discount :
The amount charged by a financial institution when a note receivable is discounted; calculated as maturity value times discount rate times discount period.
discount period :
The time between the date a note is sold to a financial institution and its maturity date.

              
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