Terms and Definitions- Accountant Glossary

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  • 7/29/2019 Terms and Definitions- Accountant Glossary


    intangible asset - an asset that lacks physical substance (i.e. patents, trademarks, copyrights)- the line item is found on the balance sheet

    book value = cost of the asset accumulated depreciation- the value at which an entity carries an asset on its balance sheet

    market value - the current or most recently-quoted price for a market-traded securityor the most probable price an asset would fetch on the open market (i.e. house)- determined by fluctuations in supply and demand (value which someone is willingto pay for it and not the amount is it offered for or intrinsically worth)

    undervalued - a security for which the market price is considered too low for its fundamentals- some metrics used to evaluate whether a security is undervalued are P/E ratio,growth potential, balance sheet health, etc.

    price to earnings ratio (P/E) - a valuation method used to compare a companys current share price to its per-share earnings- trailing P/E (last 4 quarters, actual data) and forward P/E (future 4 quarters,predictions)= market value per share / earnings per share (EPS)

    amortization - refers to the process of allocating the cost of an intangible asset over a period oftime- or refers to the repayment of loan principal over time- an asset should be amortized over its useful life or the maturity or loan period- an intangible asset with an indefinite life (i.e. goodwill) cannot be amortized

    *depreciation is for tangible assets & depletion refers to natural resourcesearnings per share (EPS) - represents the portion of a companys earnings, net of tax es and preferred stockdividends, that is allocated to each share of common stock= net income earned in a reporting period / total number of shares outstandingduring the same period- a weighted average is typically used; types include basic and fully diluted EPSs

    capital gains tax - a tax on the increase in the value of an investment

    depreciation - describes the method a company uses to account for the declining value of itsassets for tax and accounting purposes

    Methods used to calculate depreciation:- straight-line: divides the cost of the asset (minus salvage value) by itsestimated useful life- accelerated: the greatest depreciation deductions occur in the first years after anasset is purchased- capitalized: a particular asset is never depreciated- expensed: asset is fully depreciated in the first year- 150% declining balance: uses 150% of the straight-line value for the first year, thesame percentage is then applied to the residual balance each subsequent year- double declining balance: uses twice the straight-line percentage for the first yearand so on.

    tangible assets - anything that has commercial or exchange value and has a physical form- line item is reflected on the balance sheet

    Requirements for a tangible asset by the FASB:(i) must provide estimable future economic benefits(ii) must be controlled by the owner

    (iii) must be the result of a prior event or transaction such as a purchasegoodwilll - the excess of purchase price over the fair market value of a companys identifiable

    assets and liabilities- located in the assets section of a companys balance sheet, it is an intangibleasset, but often listed separately as a single line item

    useful life - the number of years in which an asset can reliably produce benefits

    principal - the face amount of a debt instrument or an amount of money borrowed- the money originally loaned, on which interest is calculated

    impairment - refers to assets that are no longer of the same value as in a prior period- usually, an impairment charge is used and the asset is revalued downward and acharge is made to net assets

  • 7/29/2019 Terms and Definitions- Accountant Glossary


    - normally happens when the value of a companys goodwill declines in marketvalue- periodic and annual impairment tests are required by Standards

    stock dividends - distribution of corporate earnings to shareholders in the form of company stocks- allows the company to pay investors without using cash- stock dividends are generally paid at infrequent intervals

    shares outstanding - refers to all shares owned by stockholders, company officials, and investors in thepublic domain, but does not include shares repurchased by a company; but does

    not include treasury stocks and unissued shares- aka issued shares, outstanding shares- number of outstanding shares listed under Capital Stock on the companysbalance sheet

    weighted average - refers to the mathematical practice of adjusting the components of an average toreflect the importance of certain characteristics- takes into account the number of outstanding shares in relation to its stock price= (share price x shares outstanding) for each company involved, then summing thetotals and then dividing by the total number of shares outstanding of all thecompanies involved

    capital gains - difference between the purchase price (the basis) and the sale price of an asset= sale price purchase price*if purchase price > sale price, a capital loss is recorded and no tax is owed

    ordinary dividends - a dividend that is not eligible for capital gains taxdepletion allowance - a tax deduction allowed in order to compensate for the depletion or using up ofnatural resource deposits such as oil, natural gas, iron, timber, etc.- the allowance is a form of cost recovery for capital investment which, unlikeincome, is not taxable

    Two forms:- cost method is where the original investment is recouped by deducting a portion ofthe capital investment each year from gross income over the estimated life of theresources deposit- percentage method involves perpetually deducting a percentage from grossincome earned whereby more than the original cost can be recouped

    salvage value - the value of an asset after it has come to the end of its useful life- aka scrap value- important in business because they affect the size of a companys depreciationexpense (and thus they affect net income)- salvage values are always estimates of the future

    non-cash charge - a write down or expense against earnings that does not involve cash- a company will take a non-cash charge against non-cash items on the balancesheet, such as depreciation, amortization, and depletion- these charges are typically made when something unusual happens, often outsidethe control of the company

    net assets - refers to the value of a companys assets minus its liabilities - for individuals, it is known as net worth= total assets total liabilities- virtually the same as shareholders equity

    adverse opinion (auditors) - refers to the conclusion by an auditor that a companys financial statements

    inaccurately characterize the companys financial statementsdividends - represents a distribution of corporate earnings to company shareholders

    - two forms: cash (paid on a quarterly basis) or stock (paid at infrequent intervals)- terms associated with dividends:

    - dividend declaration date: companys board of directors declares that a dividendwill be paid (when and how much)

    - dividend record date: company reviews its shareholders of record.shareholders who hold a particular stock on this date will receive the firmsdividend payment.

    - ex-dividend date: assigned by stock exchanges, the ex-dividend date for stocksis typically two business days prior to the record date. Investors who buy a stock

  • 7/29/2019 Terms and Definitions- Accountant Glossary


    on the ex-dividend date will not receive a dividend payment.

    market capitalization - refers to the value of a companys outstanding shares, aka market cap = current stock price x shares outstanding- theoretical cost to buy all of a companys share, not usually relied on though


    qualified dividends

    holding period

    mutual fund

    preferred stockdepletion

    capital investment


    gross income

    tax benefits

    return of capital

    cost basis


    chapter 11 bankruptcy

    chapter 7 bankruptcy

    Return on Net Assets(RONA) profitability ratio

    mergerenterprise value

    historical cost - a measure of value in which the price of an asset on the balance sheet is basedon its nominal or original cost when acquired by the company- the historical-cost method is used for assets in US GAAP- some assets such as market securities are not keep at historical cost, but marketvalue, on the balance sheet

    owner-managers - the sole owners of the company also function as the managers- very common practice in new businesses


    financing activities

    investing activities

    accounting - a system that collects and processes (analyzes, measures and records) financial

    information about an organization and reports that information to decision makersinternal decision makers

    external decision makers


    financial accounting

    balance sheet - reports the amount of assets, liabilities, and stockholders equity of an accountingentity at a point in time

    accounting entity - the organization for which financial data are to be collected

    accounting period - the time period covered by the financial statements

  • 7/29/2019 Terms and Definitions- Accountant Glossary


  • 7/29/2019 Terms and Definitions- Accountant Glossary


  • 7/29/2019 Terms and Definitions- Accountant Glossary


  • 7/29/2019 Terms and Definitions- Accountant Glossary


  • 7/29/2019 Terms and Definitions- Accountant Glossary


  • 7/29/2019 Terms and Definitions- Accountant Glossary


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