Glossary on Managerial Accounting

AAA

See "American Accounting Association".

ABC

See "activity-based costing".

Abnormal spoilage

The abnormal spoilage is the actual spoilage exceeding the expected spoilage when operations are normally efficient. The usual practice treats this cost as an expense of the period rather than as a product cost. Contrast with "normal spoilage".

Absorbed overhead

The absorbed overhead, also called the applied overhead, is the overhead costs allocated to individual products at some overhead rate.

Absorption costing

See "full absorption costing".

Abstracts of the EITF

See "Emerging Issues Task Force".

Accelerated depreciation

The accelerated depreciation is any method in which the depreciation charges become progressively smaller each period. Examples are the double declining-balance depreciation and the sum-of-the-years'-digits depreciation methods.

Account

The account is a device for representing the amount (balance) for any line (or a part of a line) in the balance sheet or income statement. Because the income statement accounts explain the changes in the balance sheet account, the retained earnings, the definition does not require the last three words of the preceding sentence. An account is any device for accumulating additions and subtractions relating to a single asset, liability, or owners' equity item, including revenues and expenses.

Account analysis method

The account analysis method is a method of separating fixed costs from variable costs based on the judgement of an analyst of whether the cost is fixed or variable. Based on the names of some costs, an analyst might classify the direct labor costs as variable and the depreciation on a factory building as fixed. Experience implies that this method results in too many fixed costs and not enough variable costs, i.e. analysts have insufficient information to judge the ability of managements to reduce costs that appear to be fixed.

Accountability center

See "responsibility center".

Accountancy

The accountancy is the British word for accounting. In the US, it means the theory and practice of accounting.

Accountant's opinion

See "auditor's report".

Accountant's report

See "auditor's report".

Accounting

The accounting is a system conveying information about a specific entity. The information is in financial terms and will appear in accounting statements only if the accountant can measure it with reasonable precision. The AICPA defines the accounting as a service activity whose function is to provide quantitative information and primarily financial in nature about economic entities that is intended to be useful in making economic decisions.

Accounting conventions

The accounting conventions are the methods or procedures used in accounting. Writers tend to use this term when the method or procedure has not yet received official authoritative sanction by a pronouncement of a group such as the APB, EITF, FASB, or SEC. Contrast with "accounting principle".

Accounting cycle

The accounting cycle is the sequence of accounting procedures starting with journal entries for various transactions and events and ending with the financial statements or, perhaps, the postclosing trial balance.

Accounting entity

See "entity".

Accounting equation

The accounting equation means that the assets equate the liabilities plus the owners' equity.

Accounting event

The accounting event is any occurrence that is recorded in the accounting records.

Accounting methods

The accounting methods are the accounting principles or the procedures for carrying out account principles.

Accounting period

The accounting period is the time period between consecutive balance sheets or the time period for which the firm prepares financial statements that measure flows, such as the income statement and the statement of cash flows.

Accounting policies

The accounting policies are the accounting principles adopted by a specific entity.

Accounting principles

The accounting principles are the methods or procedures used in accounting for events reported in the financial statements. This term tends to be used when the method or procedure has received official authoritative sanction from a pronouncement of a group such as the APB, EITF, FASB, or SEC. Contrast with "accounting conventions" and "conceptual framework".

Accounting Principles Board

See "APB".

Accounting procedures

See "accounting principles". In addition, this term usually refers to the methods for implementing accounting principles.

Accounting rate of return

The accounting rate of return is the income for period divided by the average investment during the period. It is based on the income, instead of the discounted cash flows, and thus a poor decision-making aid or tool. See also ""ratio.

Accounting standards

See "Accounting principles".

Accounting system

The accounting system is the procedures for collecting and summarizing financial data in a firm.

Accounts payable

The accounts payable are the liability representing an amount owed to a creditor, usually arising from the purchase of merchandise or materials and supplies, not necessarily due or past due. They are normally a current liability.

Accounts receivable

The accounts receivable are the claims against a debtor usually arising from sales or services rendered, not necessarily due or past due. They are normally a current asset.

Accounts receivable turnover

The accounts receivable turnover is the net sales on account divided by the average accounts receivable. See also "ratio".

Accretion

The accretion, as opposed to the amortization, is the correct technical term referring to the growing amount of an item, such as a bond originally issued at a discount, in the book value over time. It also refers to an increase in economic worth through physical change caused by natural growth, usually said of a natural resource such as timber. Contrast with "appreciation". See also "amortization".

Accrual

The accrual is the recognition of an expense (or revenue) and the related liability (or asset) resulting from an accounting event, frequently from the passage of time but not signaled by an explicit cash transaction, e.g. the recognition of interest expense or revenue (or wages, salaries, or rent) at the end of a period even though the firm makes no explicit cash transaction at that time. The cash flow follows the accounting recognition. Contrast with "deferral".

Accrual basis of accounting

The accrual basis of accounting is the method of recognizing revenues as a firm sells goods (or delivers them) and as it renders services, independent of the time when it receives cash. This system recognizes expenses in the period when it recognizes the related revenue, independent of the time when it pays out cash. SFAC No.1 says that the accrual accounting attempts to record the financial effects on an enterprise of transactions and other events and circumstances that have cash consequences for the enterprise in the periods in which those transactions, events, and circumstances occur rather than only in the periods in which cash is received or paid by the enterprise. Contrast with "cash basis of accounting". See also "accrual" and "deferral". The accrual basis of accounting can be more correctly called the accrual/deferral accounting.

Accrue

See "accrued" and contrast with "incur".

Accrued

The accrued is said of a revenue (expense) that the firm has earned (recognized) even though the related receivable (payable) has a future due date. This term is preferred not to be used as part of an account title. For example, the title such as the interest receivable (payable) is more preferable than that such as the accrued interest receivable (payable). See also "matching convention" and "accrual". Contrast with "incur".

Accumulated depreciation

The accumulated depreciation, also called the allowance for depreciation (acceptable term) and the reserve for depreciation (unacceptable term), is a preferred title for the asset contra-account that shows the sum of depreciation charges on an asset since the time the firm acquired it.

Accurate presentation

The accurate presentation is the qualitative accounting objective suggesting that information reported in financial statements should correspond as precisely as possible with the economic effects underlying transactions and events. See also "fair presentation" and "full disclosure".

Acid test ratio

See "quick ratio".

Acquisition cost

The acquisition cost is a cost of an asset, which is calculated as the net invoice price plus all expenditures to place and ready the asset for its intended use. The legal fees, the transportation charges, and installation costs might be included.

Activity accounting

See "responsibility accounting".

Activity-based costing

The activity-based costing, or ABC, is the method of assigning indirect costs, including nonmanufacturing overhead costs, to products and services. ABC assumes that almost all overhead costs correspond to activities within the firm and vary with respect to the drivers of those activities. Some practitioners suggest that ABC attempts to find the drivers for all indirect costs and note that, in the long run, all costs are variable, so fixed indirect costs do not occur. This method first assigns costs to activities and then to products based on the usages of the activities by the products.

Activity-based management

The activity-based management, or ABM, is the management process that uses the information provided by an activity-based costing analysis, or ABC analysis, to improve organizational profitability. ABM includes performing activities more efficiently, eliminating the need to perform certain activities that do not add value for customers, improving the design of products, and developing better relations with customers and suppliers. ABM attempts to satisfy customer needs while making fewer demands on organizational resources.

Activity basis

The activity basis is a way of thought in which costs are determined as variable or fixed (incremental or unavoidable) with respect to some activity, such as production of units (or the undertaking of some new project).

Activity center

The activity center is a unit of the organization that performs a set of tasks.

Activity variance

See "sales volume variance".

Actual cost

See "acquisition cost" and "historical cost". Contrast with "standard cost".

Actual costing system

The actual costing system is a method of allocating costs to products using actual direct materials, actual direct labor, and actual factory overhead. Contrast with "normal costing" and "standard costing".

Actuarial

The actuarial is an adjective describing computations or analyses that involve both compound interest and probabilities, such as the computation of the present value of a life-contingent annuity. Some people use this word even for computations involving only one of the two.

Additional paid-in capital

The additional paid-in capital is an alternative acceptable title for the capital contributed in excess of par (or stated) value account.

Additional processing cost

The additional processing cost is the costs incurred in processing joint products after the splitoff point.

Adjunct account

The adjunct account is an account that accumulates additions to another account. For example, the account of the premium on bonds payable is adjunct to the liability account of the bonds payable, in which case, the effective liability is the sum of the two account balances at a given date. Contrast with "contra-account".

Adjusted acquisition cost

The adjusted acquisition cost, also called the adjusted historical cost, is sometimes said of the book value of a plant asset, i.e. the acquisition cost less accumulated depreciation. Also, it is the cost adjusted to a constant dollar amount to reflect general price-level changes.

Adjusted trial balance

The adjusted trial balance is the trial balance taken after adjusting entries but before closing entries. Contrast with "preclosing trial balance" and "post-closing trial balance". See also "unadjusted trial balance".

Adjusting entry

The adjusting entry is an entry made at the end of an accounting period to record a transaction or other accounting event that the firm has not yet recorded or has improperly recorded during the accounting period. It is an entry to update the accounts.

Administrative costs

The administrative costs, also called the administrative expenses, are the costs incurred for the firm as a whole, in contrast with specific functions, such as manufacturing or selling, including such items as salaries of top executives, general office rent, legal fees, and auditing fees.

Advances from customers

The advances from customers, also called the advances by customers, are a preferred title for the liability account representing receipts of cash in advance of delivering the goods or rendering the service. After the firm delivers the goods or services, it will recognize revenue. This title is sometimes called the deferred revenue or deferred income.

Advances to suppliers

The advances to suppliers are a preferred term for the asset account representing disbursements of cash in advance of receiving assets or services.

Affiliated company

The affiliated company is a company controlling or controlled by another company.

Agency cost

The agency cost is the cost incurred by principals to control the actions of agents and the cost to the principal if agents pursue their own interests.

Agency theory

The agency theory is a branch of economics relating the behavior of principals, such as owner non-managers or bosses, and that of their agents, such as non-owner managers or subordinates. The principal assigns responsibility and authority to the agent, but the risks and preferences of the agent differ from those of the principal. The principal cannot observe all activities of the agent. Both the principal and the agent must consider the differing risks and preferences in designing incentive contracts.

Agent

The agent is the one authorized to transact business, including executing contracts, for another.

Aging accounts receivable

Aging accounts receivable is the process of classifying accounts receivable by the time elapsed since the claim came into existence for the purpose of estimating the amount of uncollectible accounts receivable as of a given date. See also "allowance for uncollectibles".

Aging schedule

The aging schedule is a listing of accounts receivable, classified by age, used in aging accounts receivable.

AICPA

The AICPA, or the American Institute of Certified Public Accountants, is the national organization that represents CPAs and oversees the writing and grading of the Uniform CPA Examination. Each state sets its own requirements for becoming a CPA in that state. See also "certified public accountant".

All-capital earning rate

See "rate of return on assets".

All-current method

The all-current method is the foreign currency translation in which all financial statement items are translated at the current exchange rate.

All-inclusive concept

The all-inclusive concept, also called the all-income concept, is a concept that does not distinguish between operating and nonoperating revenues and expenses. Thus, the only entries to retained earnings are for net income and dividends. Under this concept, the income statement reports all income, gains, and losses, i.e. the net income includes events usually reported as the prior-period adjustments and as the correction of errors.

Allocate

Allocating means dividing or spreading a cost from one account into several accounts, to several products or activities, or to several periods.

Allocation base

The allocation base is the systematic method that assigns joint costs to cost objectives. For example, if a firm assigns the cost of a truck to periods based on miles driven during the period, the allocation base is miles. Or, if the firm assigns the cost of a factory supervisor to a product based on direct labor hours, the allocation base is direct labor hours. It is a cost driver used for applying overhead to production.

Allowance

The allowance is a balance sheet contra-account generally used for receivables and depreciable assets.

Allowance for uncollectibles

The allowance for uncollectibles, also called the allowance for accounts receivable, is a contra-account that shows the estimated amount of accounts receivable the firm expects not to collect. When the firm uses such an allowance, the actual write-off of specific accounts receivable (debit the allowance, credit specific the account of a specific customer) does not affect revenue or expense at the time of the write-off. The firm reduces revenue when it debits the bad debt expense and credits the allowance. The firm can base the amount of the credit to the allowance on a percentage of sales on account for a period of time or compute it from aging accounts receivable. This contra-account enables the firm to show an estimate of the amount of receivables that it expects to collect without identifying specific uncollectible accounts. See also "allowance method".

Allowance method

The allowance method is a method of attempting to match all expenses of a transaction with their associated revenues and usually involves a debit to expense and a credit to an estimated liability, such as for estimated warranty expenditures, or a debit to a revenue contra-account and a credit to an asset contra-account, such as in accounting for some uncollectible accounts. See also "allowance for uncollectibles". When the firm uses the allowance method for sales discounts, the firm records sales at gross invoice prices, which are not reduced by the amounts of discounts made available. The firm debits an estimate of the amount of discounts to be taken to a revenue contra-account and credits an allowance account, shown contra to accounts receivable.

American Accounting Association

The American Accounting Association, or AAA, is an organization primarily for academic accountants, but open to all interested in accounting. It publishes the Accounting Review and several other journals.

American Institute of Certified Public Accountants

See "AICPA".

Amortization

The amortization is, strictly speaking, the process of liquidating or extinguishing (bringing to death) a debt with a series of payments to the creditor (or to a sinking fund). That usage has evolved a related use involving the accounting for the payments themselves: the amortization schedule for a mortgage, which is a table showing the allocation between the interest and principal. The term has come to mean writing off (liquidating) the cost of an asset. In this context, it means the general process of allocating the acquisition cost of an asset either to the periods of benefit as an expense or to inventory accounts as a product cost. This is called depreciation for plant assets, depletion for wasting assets (natural resources), and amortization for intangibles. SFAC No.6 refers to amortization as the accounting process of reducing an amount by periodic payments or write-downs. The expressions of "unamortized debt discount or premium" and "to amortize debt discount or premium" relate to accruals, not to deferrals. The expressions of "amortization of long-term assets" and "to amortize long-term assets" refer to deferrals, not accruals. Contrast with "accretion".

Analysis of variances

See "variance investigation".

Annual report

The annual report is a report prepared once a year for shareholders and other interested parties and includes a balance sheet, an income statement, a statement of cash flows, a reconciliation of changes in owners' equity accounts, a summary of significant accounting principles, other explanatory notes, the auditor's report, and comments from management about the events of the year. See also "financial statements".

Annuitant

The annuitant is one who receives an annuity.

Annuity

The annuity is a series of payments of equal amount, usually made at equally spaced time intervals.

Annuity certain

The annuity certain is an annuity payable for a definite number of periods. Contrast with "contingent annuity".

Annuity due

The annuity due is an annuity whose first payment occurs at the start of period 1 (or at the end of period 0). Contrast with "annuity in arrears".

Annuity in advance

See "annuity due".

Annuity in arrears

The annuity in arrears is an ordinary annuity whose first payment occurs at the end of the first period.

APB

The APB, or the Accounting Principles Board of the AICPA, set accounting principles from 1959 through 1973, issuing 31 APB Opinions and 4 APB Statements. The FASB superseded it.

APB Opinion

The APB Opinion is the name for pronouncements of the APB that compose much of generally accepted accounting principles. The APB issued 31 APB Opinions from 1962 through 1973.

Applied cost

The applied cost is a cost that a firm has allocated to a department, product, or activity and is not necessarily based on actual costs incurred.

Applied overhead

The applied overhead, also called the absorbed overhead, is the overhead costs charged to departments, products, or activities.

Appraisal costs

The appraisal costs, also called the detection costs, are the costs incurred to detect individual units of products that do not conform to specifications.

Appreciation

The appreciation is an increase in economic value caused by rising market prices for an asset. Contrast with "accretion".

Approximate net realizable value method

The approximate net realizable value method is a method of assigning joint costs to joint products based on revenues minus additional processing costs of the end products.

Arbitrary

The arbitrary means having no causation basis. Accounting theorists and practitioners often, properly, say, "Some cost allocations are arbitrary". In that sense, the accountant does not mean that the allocations are capricious or haphazard but does mean that theory suggests no unique solution to the allocation problem at hand. Accountants require that arbitrary allocations be systematic, rational, and consistently followed over time.

Arm's length

The arm's length is a transaction negotiated by unrelated parties, both acting in their own self-interests and is the basis for a fair market value estimation or computation.

Articulate

The articulate is the relation between any operating statement, such as an income statement and a statement of cash flows, and comparative balance sheets, where the operating statement explains (or reconciles) the change in some major balance sheet category, such as the retained earnings and the working capital.

Asset

The FASB defines assets as the probable future economic benefits obtained or controlled by a particular entity as a result of past transactions. An asset has three essential characteristics: (1) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows, (2) a particular entity can obtain the benefit and control the access of others to it, and (3) the transaction or other event giving rise to the right of the entity to the benefit or the control of the benefit by the entity has already occurred. A footnote points out that "probable" means that which we can reasonably expect or believe but that is not certain or proved. The condition (3) may be understood better if it is thought of as requiring that a future benefit cannot be an asset if it arises from an executory contract, a mere exchange of promises. Receiving a purchase order from a customer provides a future benefit, but it is an executory contract, so the order cannot be an asset. An asset may be tangible or intangible, short-term (current) or long-term (noncurrent).

Asset turnover

The asset turnover is the net sales divided by average assets. See also "ratio".

At par

At par means a bond or preferred shares issued (or selling) at face amount.

Attest

Attesting means the rendering of an opinion by an auditor that the financial statements are fair. The common usage calls this procedure the attest function of the CPA. See also "fair presentation".

Attestor

The attester is typically independent CPAs, who audit financial statements prepared by management for the benefit of users. The FASB describes the constituency of an accounting as comprising preparers, attestors, and users.

Attribute measured

The attribute measured is the particular cost reported in the balance sheet. When making physical measurements, such as of a person, one needs to decide the units with which to measure, such as inches or centimeters or pounds or grams. One chooses the attribute height or weight independently of the measuring unit, English or metric. The conventional accounting uses the historical cost as the attribute measured and the nominal dollars as the measuring unit. Some theorists argue that the accounting would better serve readers if it used the current cost as the attribute measured. Others argue that the accounting would better serve readers if it used the constant dollars as the measuring unit. Some think that the accounting should change both the measuring unit and the attribute measured. One can measure the attribute historical cost in nominal dollars or in constant dollars. One can also measure the attribute current cost in nominal dollars or constant dollars. Choosing between the two attributes and the two measuring units implies four different accounting systems. Each of these four has its uses.

Attribute sampling

The attribute sampling is the use of sampling technique in which the observer assesses each item selected on the basis of whether it has a particular qualitative characteristic in order to ascertain the rate of occurrence of this characteristic in the population. See also "estimation sampling". Compare with "variables sampling".

Audit

The audit is the systematic inspection of accounting records involving analyses, tests, and confirmations. See also "internal audit".

Audit committee

The audit committee is a committee of the board of directors of a corporation, usually comprising outside directors, who nominate the independent auditors and discuss the work of the auditors with them. If the auditors believe that the shareholder should know about certain matters, the auditors, in principle, first bring these matters to the attention of the audit committee, but, in practice, the auditors may notify management before they notify the audit committee.

Audit program

The audit program is the procedures followed by the auditor in carrying out the audit.

Audit trail

The audit trail is a reference accompanying an entry, or post, to an underlying source record or document. Efficiently checking the accuracy of accounting entries requires an audit trail. See also "cross-reference".

Auditing standards

The auditing standards are the standards promulgated by the AICPA, including general standards, standards of fieldwork, and standards of reporting. According to the AICPA, these standards deal with the measures of the quality of the performance and the objectives to be attained rather than with specific auditing procedures.

Auditor

The auditor, without modifying adjective, usually refers to an external auditor, one who checks the accuracy, fairness, and general acceptability of accounting records and statements and then attests to them. See also "internal auditor".

Auditor's opinion

See "auditor's report".

Auditor's report

The auditor's report, often called the accountant's report, is the statement of an auditor of the work done and is the opinion of the financial statements. The auditor usually gives unqualified (clean) opinions but may qualify them, or the auditor may disclaim an opinion in the report.

Available-for-sale securities

The available-for-sale securities are the marketable securities a firm holds that are classified as neither trading securities nor held-to-maturity debt securities. This classification is important in SFAS No. 115, which requires the owner to carry marketable equity securities on the balance sheet at market value, not at cost. Under SFAS No. 115, the income statement reports holding gains and losses on trading securities but not on securities available for sale. The required accounting credits (debits) holding gains (losses) on securities available for sale directly to an owners' equity account. On sale, the firm reports the realized gain or loss as the difference between the selling price and the original cost, for trading securities, and as the difference between the selling price and the book value at the beginning of the period of sale for securities available for sale and for debt securities held to maturity. By their nature, however, the firm will only rarely sell debt securities held to maturity.

Average

The average is the arithmetic mean of a set of numbers and is obtained by summing the items and dividing by the number of items.

Average collection period of receivables

See "ratio".

Average-cost flow assumption

The average-cost flow assumption is an inventory flow assumption in which the cost of units equals the weighted average cost of the beginning inventory and purchases. See also "inventory equation".

Average tax rate

The average tax rate is the rate found by dividing income tax expense by net income before taxes.

Avoidable cost

The avoidable cost is a cost that ceases if a firm discontinues an activity and is an incremental or variable cost. See also "programmed cost".

Backflush costing

The backflush costing is a method of allocating indirect costs and overhead and is used by companies that hope to have zero or small work-in-process inventory at the end of the period. The method debits all product costs to the cost of goods sold or the finished goods inventory during the period. To the extent that the work in process actually exists at the end of the period, the method then debits work-in-process and credits cost of goods sold or finished goods inventory. This is a "backflush" method in the sense that costing systems ordinarily, but not in this case, allocate first to work in process and then forward to cost of goods sold or to finished goods. Here, the process allocates first to cost to goods sold or finished goods and then, later if necessary, to work-in-process.

Backlog

The backlog is the orders for which a firm has insufficient inventory on hand for current delivery and will fill in a later period.

Bad debt

See "uncollectible account" and "bad debt expense".

Bad debt expense

The bad debt expense is the name for an account debited in both the allowance method for uncollectible accounts and the direct write-off method. Under the allowance method, some prefer to treat the account as a revenue contra, not as an expense, and give it an account title such as the uncollectibles accounts adjustment.

Bailout period

The bailout period is, in a capital budgeting context, the total time that elapses before accumulated cash inflows from a project, including the potential salvage value of assets at various times, equal or exceed the accumulated cash outflows. Contrast with "payback period", which assumes the completion of the project and uses terminal salvage value. The bailout, in contrast with the payback, takes into account, at least to some degree, the present value of cash flows after the termination date that an analyst is considering. The potential salvage value at any time includes some estimate of the flows that can occur after that time.

Balance

The balance is, as a noun, the opening balance in an account plus the amounts of increases less the amounts of decreases. In the absence of a modifying adjective, the term means the closing balance, in contrast to the opening balance. The closing balance for a period becomes the opening balance for the next period. As a verb, it means to find the value of the arithmetic expression described above.

Balance sheet

The balance sheet is a statement of financial position that shows the total assets equal to the total liabilities plus the owners' equity. The balance sheet usually classifies the total assets as (1) the current assets, (2) the investments, (3) the property, plant, and equipment, and (4) the intangible assets. The balance sheet accounts composing the total liabilities usually appear under the headings of the current liabilities and the long-term liabilities.

Balance sheet account

The balance sheet account is an account that can appear on a balance sheet and is a permanent account. Contrast with "temporary account".

Balanced scorecard

The balanced scorecard is a set of performance targets, not all set in dollar amounts, for setting the goals of an organization for its individual employees or groups or divisions. A community relations employee might, for example, set targets in terms of the number of employee hours devoted to local charitable purposes.

Balloon

The balloon is the loan requiring relatively equal periodic payments with a large final payment. The usage calls the large final payment the balloon payment and the loan the balloon loan. Although a coupon bond meets this definition, the usage seldom, if ever, applies this term to the bond loans.

Bankrupt

The bankrupt occurs when the liabilities of a company exceed its assets and the firm or one of its creditors has filed a legal petition that the bankruptcy court has accepted under the bankruptcy law. A bankrupt firm is usually, but need not be, insolvent.

Basic earnings per share

The basic earnings per share, or BEPS, is the concept proposed by the FASB on the basis of the guidance from the IASC to replace the primary earnings-per-share computations and disclosures. BEPS equals net income attributable to common shareholders divided by the weighted-average number of common shares outstanding during the period. Contrast with "primary earnings per share". Because BEPS does not deal with common-stock equivalents, it will almost always give a larger earnings-per-share figure than PEPS.

Basis

The basis is an acquisition cost, or some substitute therefor, of an asset or liability used in computing gain or loss on disposition or retirement. It is the attribute measured. The term appears in both financial and tax reporting, but the basis of a given item need not be the same for both purposes.

Basket purchase

The basket purchase is the purchase of a group of assets (and liabilities) for a single price. The acquiring firm must assign costs to each item so that it can record the individual items with their separate amounts in the accounts.

Batch-level activities

The batch-level activities are the activities in which several units of service or product requires the same setup of personnel or equipment.

Bear

The bear is the one who believes that securities prices will fall. A bear market refers to a time when stock prices are generally declining. Contrast with "bull".

Beginning inventory

The beginning inventory is the valuation of inventory on hand at the beginning of the accounting period and equals to the ending inventory from the preceding period.

Behavioral congruence

See "goal congruence".

Benchmarking

The benchmarking is the process of measuring the performance, products, and services of a firm against the standards based on the best levels of performance achievable or, sometimes, achieved by other firms.

BEPS

See "basic earnings per share".

Bid

The bid is an offer to purchase, or the amount of the offer.

Bill

The bill is an invoice of charges and terms of sale for goods and services and is also a piece of currency.

Bill of material

The bill of material is a specification of the quantities of direct materials a firm expects to use to produce a given job or quantity of output.

Board

See "board of directors".

Board of directors

The board of directors is the governing body of a corporation and is elected by the shareholders.

Bond

The bond is a certificate to show the evidence of debt. The par value is the principal or face amount of the bond payable at maturity. The coupon rate is the amount of the yearly payments divided by the principal amount. Coupon bonds have attached to them coupons that the holder can redeem at stated dates. Increasingly, firms issue not coupon bonds but instead registered bonds, where the firm or its agent keeps track of the owner. Normally, bonds call for semiannual payments.

Bond ratings

The bond ratings are the ratings of corporate and municipal bond issues by Moody's Investors Service and by Standard & Poor's Corporation, based on the existing debt level of an issuer, its previous record of payment, the coupon rate on the bonds, and the safety of the assets or revenues that are committed to paying off the principal and interest.

Bond redemption

See "retirement of bonds".

Bond refunding

The bond refunding is to incur debt, usually through the issue of new bonds, the proceeds of which the issuer intends to use to retire an outstanding bond issue.

Bonus

The bonus is the premium over normal wage or salary, paid usually for meritorious performance.

Book

The book, as a verb, means to record a transaction and, as a noun, means the journals and ledgers. See also "book value", which is the same meaning of the book as an adjective.

Book cost

See "book value".

Book inventory

The book inventory is an inventory amount that results not from physical count but from the amount of beginning inventory plus invoice amounts of net purchases less invoice amounts of requisitions or withdrawals, implying a perpetual inventory method.

Book of original inventory

See "journal".

Book value

The book value is the amount shown in the books or in the accounts for an asset, liability, or owners' equity item. The term is generally used to refer to the net amount of an asset or group of assets shown in the account that records the asset and reductions in its cost, such as for amortization. Of a firm, it refers to the excess of total assets over total liabilities, or the net assets.

Book value per share of common stock

The book value per share of common stock is the common shareholders' equity divided by the number of shares of common stock outstanding. See also "ratio".

Bookkeeping

The bookkeeping is the process of analyzing and recording transactions in the accounting records.

Borrower

See "loan".

Bottleneck

The bottleneck is an operation in which the work to be performed equals or exceeds the available capacity.

Break-even analysis

See "break-even chart".

Break-even chart

The break-even chart is categorized into two kinds of graph: the cost-volume-profit graph and the profit-volume graph. The cost-volume-profit graph presents the relation between the changes in volume to the amount of profit, or income. Such a graph shows the total revenue and the total costs for each volume level, and the user reads profit or loss at any volume directly from the chart. The profit-volume graph does not show revenues and costs, but more readily indicates profit (or loss) at various output levels.

Break-even point

The break-even point is the volume of sales required so that the total revenues equal the total costs and may be expressed in units (= fixed costs / unit contribution) or in sales dollars (= selling price * fixed costs / unit contribution).

Break-even time

The break-even time, or BET, is the length of time required to recover the investment made in a new-product development.

Budget

The budget is a financial plan that a firm uses to estimate the results of future operations and is frequently used to help control future operations. In governmental operations, the budgets often become the law. See also "standard costs" for further elaboration and contrast.

Budgeted cost

See "standard costs" for definition and contrast.

Budgeted statements

The budgeted statements are the pro forma statements prepared before the event or period occurs.

Bull

The bull is the one who believes that security prices will rise. The bull market refers to a time when stock prices are generally rising. Contrast with "bear".

Burden

See "overhead costs".

Burn rate

The burn rate measures how long a new business can survive before operating losses must stop or the firm must receive a new infusion of cash.

Business entity

See "entity".

By-product

The by-product is a joint product whose sales value is so small relative to the sales value of the other joint product(s) that it does not receive normal accounting treatment. The costs assigned to by-products reduce the costs of the main product(s). Accounting allocates by-products a share of joint costs such that the expected gain or loss at their sale is zero. Thus, by-products appear in the accounts at net realizable value.

Bylaws

The bylaws are the rules adopted by the shareholders of a corporation specifying the general methods for carrying out the functions of the corporation.

Capacity

The capacity, stated in units of product, is the amount that a firm can produce per unit of time, and stated in units of input, such as direct labor hours, is the amount of input that a firm can use in production per unit of time. A firm uses this measure of output or input in allocating fixed costs if the amounts producible are normal, rather than maximum, amounts.

Capacity cost

The capacity cost is a fixed cost incurred to provide a firm with the capacity to produce or to sell. It consists of the standby costs and the enabling costs. Contrast with "programmed costs".

Capacity variance

See "production volume variance".

Capital

The capital is the owners' equity in a business and is often used, equally correctly, to mean the total assets of a business. It is sometimes used to mean capital assets.

Capital asset

The capital asset is a designation for income tax purposes that describes property held by a taxpayer not including cash, inventoriable assets, goods held primarily for sale, mot depreciable property, real estate, receivables, certain intangibles, or certain other items. It is sometimes used imprecisely to describe plant and equipment, which are clearly not capital assets under the income-tax definition. It is often used to refer to an investment in securities.

Capital budget

The capital budget is a plan of proposed outlays for acquiring long-term assets and the means of financing the acquisition.

Capital budgeting

The capital budgeting is the process of choosing investment projects for an enterprise by considering the present value of cash flows and deciding how to raise the funds the investment requires.

Capital expenditure

The capital expenditure, also called the capital outlay and the CAPEX, is an expenditure to acquire long-term assets.

Capital gain

The capital gain is the excess of proceeds over cost, or other basis, from the sale of a capital asset as defined by the Internal Revenue Code. If the taxpayer has held the capital asset for a sufficiently long time before sale, then the gain is taxed at a rate lower than that used for other gains and ordinary income.

Capital lease

The capital lease is a lease treated by the lessee as both the borrowing of funds and the acquisition of an asset to be amortized. The lessee (tenant) recognizes both the liability and the asset on its balance sheet. Expenses consist of interest on the debt and amortization of the asset. The lessor (landlord) treats the lease as the sale of the asset in return for a series of future cash receipts. Contrast with "operating lease".

Capital loss

The capital loss is a negative capital gain. See also "capital gain".

Capital rationing

The capital rationing is, in a capital budgeting context, the imposition of constraints on the amounts of the total capital expenditures in each period.

Capital stock

The capital stock is the ownership shares of a corporation and consists of all classes of common and preferred shares.

Capital structure

The capital structure is the composition of the equities of a corporation and is the relative proportions of short-term debt, long-term debt, and owners' equity.

Capitalization of a corporation

The capitalization of a corporation is a term used by investment analysts to indicate the shareholders' equity plus bonds outstanding.

Capitalization rate

The capitalization rate is an interest rate used to convert a series of payments, receipts, or earnings into a single present value.

Capitalize

Capitalizing means to record an expenditure that may benefit a future period as an asset rather than to treat the expenditure as an expense of the period of its occurrence. Whether expenditures for advertising or for research and development should be capitalized is controversial, but SFAS No. 2 forbids capitalizing R&D costs.

Carrying cost

The carrying cost is the cost s, such as property taxes and insurance, of holding or storing inventory from the time of purchase until the time of sale or use.

Carrying value

See "book value".

CASB

The CASB, or the Cost Accounting Standards Board, is a board authorized by the US Congress to promulgate cost-accounting standards designed to achieve uniformity and consistency in the cost-accounting principles followed by defense contractors and subcontractors under federal contracts. The principles the CASB promulgated since 1970 have considerable weight in practice wherever the FASB has not established a standard. Congress allowed the CASB to go out of existence in 1980 but reinstated it in 1990.

Cash

The cash is the currency and coins, negotiable checks, and balances in bank accounts. For the statement of cash flows, the cash also includes marketable securities held as current assets.

Cash basis accounting

The cash basis of accounting, in contrast to the accrual basis of accounting, is a system of accounting in which a firm recognized revenues when it receives cash and recognizes expenses as it makes disbursement. The firm makes no attempt to match revenues and expenses in measuring income.

Cash budget

The cash budget is a schedule of expected cash receipts and disbursements.

Cash cycle

The cash cycle, sometimes called the earnings cycle, is the period of time that elapses during which a firm converts cash into inventories, inventories into accounts receivable, and receivables back into cash.

Cash discount

The cash discount is a reduction in sales or purchase price allowed for a prompt payment.

Cash dividend

See "dividend".

Cash equivalent value

The cash equivalent value, sometimes called the market value, the fair market price, and the fair market value, is a term used to describe the amount for which an asset could be sold.

Cash flow

The cash flow is the cash receipts minus the disbursements from a given asset, or a group of assets, for a given period. Financial analysts sometimes use this term to mean the net income plus the depreciation and amortization. See also "operating cash flow" and "free cash flow".

Cash flow from operations

The cash flow from operations, also called the cash provided by operations, is the receipts from customers and from investments less expenditures for inventory, labor, and services, used in the usual activities of a firm, less interest expenditures. See also "statement of cash flows" and "operations".

Cash flow statement

See "statement of cash flows".

Cash provided by operations

The cash provided by operations is an important subtotal in the statement of cash flows. This amount equals the total of revenues producing cash less expenses requiring cash and often appears as the net income plus expenses not requiring cash such as depreciation charges minus revenues not producing cash such as revenues recognized under the equity method of accounting for a long-term investment. The statement of cash flows maintains the same distinctions between continuing operations, discontinued operations, and income or loss from extraordinary items as does the income statement.

Cash yield

See "yield".

Cashier's check

The cashier's check is a check of a bank drawn on itself and signed by the cashier or other authorized official and is a direct obligation of the bank.

Cause-and-effect analysis

The cause-and-effect analysis defines the effect and lists events that may contribute to the problem (causes).

Central corporate expenses

The central corporate expenses are the general overhead expenses incurred in running the corporate headquarters and related supporting activities of a corporation. Accounting treats these expenses as period expenses. Contrast with "manufacturing overhead". Line-of-business reporting must decide how to treat these expenses, i.e. whether to allocate them to the individual segments and, if so, how to allocate them.

Central processing unit

The central processing unit, or CPU, is the component of a computor system carrying out the arithmetic, logic, and data transfer.

Certificate

The certificate is the document that is the physical embodiment of a bond or a share of stock. The term is sometimes used for the auditor's report.

Certified internal auditor

See "CIA".

Certified management accountant

See "CMA".

Certified public accountant

The certified public accountant, or CPA, is an accountant who has satisfied the statutory and administrative requirements of his or her jurisdiction to be registered or licensed as a public accountant. In addition to passing the Uniform CPA Examination administered by the AICPA, the CPA must meet certain educational, experience, and moral requirements that differ from jurisdiction to jurisdiction.

CGA

The CGA, or the Certified General Accountant, is an accountant in Canada who has satisfied the experience, education, and examination requirements of the Certified General Accountants' Association.

Charge

The charge, as a noun, means a debit to an account and, as a verb, means to debit.

Charge off

Charging off means to treat as a loss or expense an amount originally recorded as an asset. The use of this term implies that the charge is not in accord with original expectations.

Chart of accounts

The chart of accounts is a list of names and numbers, systematically organized, of accounts.

Charter

The charter is the document issued by a state government authorizing the creation of a corporation.

Chartered accountant

The chartered accountant, or the CA, is the title used in Australia, Canada, and the United Kingdom for an accountant who has satisfied the requirement of the institute of his or her jurisdiction to be qualified to serve as a public accountant. In Canada, each provincial institute or order has the right to administer the examination and set the standards of performance and ethics for Chartered Accountants in its province. For a number of years, however, the provincial organizations have pooled their rights to qualify new members through the Inter-provincial Education Committee, and the result is that there are nationally set and graded examinations given in English and French. Deviation from the pass/fail grade awarded by the Board of Examiners, a sub-committee of the Inter-provincial Education Committee, is rare.

CIA

The CIA, or the Certified Internal Auditor, is the one who has satisfied certain requirements of the Institute of Internal Auditors, including experience, ethics, education, and examinations.

CICA

The CICA is the abbreviation for the Canadian Institute of Chartered Accountants.

Clean opinion

See "auditor's report".

Close

Closing means, as a verb, to transfer the balance of a temporary, contra-, or adjunct account to the main account to which it relates, e.g. to transfer revenue and expense accounts directly, or through the income summary account, to an owners' equity account or to transfer purchase discounts to purchases.

Closed account

The closed account is an account with equal debits and credits, usually as a result of a closing entry.

Closing entries

The closing entries are the entries that accomplish the transfer of balances in temporary accounts to the related balance sheet accounts.

Closing inventory

See "ending inventory".

CMA certificate

The CMA certificate, or the Certified Management Accountant certificate, is awarded by the Institute of Certified Management Accountants of the Institute of Management Accountants to those who pass a set of examinations and meet certain experience and continuing- education requirements.

Collateral

The collateral is the assets pledged by a borrower who will surrender those assets if he or she fails to repay a loan.

Collectible

Being collectible means to be capable of being converted into cash now if due, later otherwise.

Collusion

The collusion is the cooperative effort by employees to commit fraud or another unethical act.

Commercial paper

The commercial paper is the short-term notes issued by corporate borrowers.

Commission

The commission is the remuneration, usually, usually expressed as a percentage, to employees based on an activity rate, such as sales.

Committed costs

See "capacity costs".

Common cost

The common cost is the cost resulting from the use of raw materials, a facility such as plant or machines, or a service such as fire insurance that benefits several products or departments. A firm must allocate this cost to those products or departments. Common costs result when two or more departments produce multiple products together even though the departments could produce them separately. Joint costs occur when two or more departments must produce multiple products together. The terms, "common costs" and "joint costs", are often used synonymously, though. See "joint cost", "indirect costs", and "overhead costs". See also "sterilized allocation".

Common shares

The common shares are the shares representing the class of owners who have residual claims on the assets and earnings of a corporation after the firm meets all the claims of its creditors and preferred shareholders.

Common-size statement

The common-size statement is a percentage statement usually based on the total assets or net sales or revenues.

Companywide control

See "control system".

Comparative financial statements

The comparative financial statements are the financial statements showing information for the same company for different times, usually two successive years for balance sheets and three for income and cash flow statements. Nearly all published financial statements are in this form. Contrast with "historical summary".

Competitive benchmarking

The competitive benchmarking means to identify an activity that needs to be improved, to find an organization that is the most efficient at that activity, to study its process, and then to use that process.

Compliance audit

The compliance audit is to objectively obtain and evaluate the evidence regarding assertions, actions, and events to ascertain the degree of correspondence between them and established performance criteria.

Compliance procedure

The compliance procedure is an audit procedure used to gain evidence as to whether the prescribed internal controls are operating effectively.

Composite cost of capital

See "cost of capital".

Compound interest

The compound interest is the interest calculated on the principal plus the previously undistributed interest.

Compounding period

The compounding period is the time period, usually a year or a portion of a year, for which a firm calculates interests. At the end of the period, the borrower may pay interest to the lender or may add the interest, i.e. convert it, to the principal for the next interest-earning period.

Comprehensive budget

See "master budget".

Comptroller

The comptroller is the same as the controller.

Conceptual framework

The conceptual framework is a coherent system of interrelated objectives and fundamentals, promulgated by the FASB and expected to lead to consistent standards for financial accounting and reporting.

Confidence level

The confidence level is the measure of probability that the actual characteristics of the population lie within the stated precision of the estimate derived from a sampling process. A sample estimate derived from a sampling process. A sample estimate may be expressed in the following terms. Based on the sample, we are 95 percent sure (the confidence level) that the true population value is within the range of X to Y (the precision). See also "precision".

Conservatism

The conservatism is a reporting objective that calls for anticipation of all losses and expenses but defers recognition of gains or profits until they are realized in arm's-length transactions. In the absence of certainty, a conservative approach would report events to minimize cumulative income. Conservatism does not mean reporting low income in every accounting period. Over long-enough time spans, income is cash in less cash out. If a conservative reporting method shows low income in early periods, it must show higher income in some later period.

Consistency

The consistency is the treatment of like transactions in the same way in consecutive periods so that financial statements will be more comparable than otherwise. It is the reporting policy implying that a reporting entity, once it adopts specified procedures, should follow them from period to period.

Consolidated financial statements

The consolidated financial statements are the statements issued by legally separated companies that show financial position and income as they would appear if the companies were one economic entity.

Contingency

The contingency is a potential liability. If a specified event occurs, such as the losing of a lawsuit of a firm, it would recognize a liability. The notes disclose the contingency, but so long as it remains contingent, it does not appear in the balance sheet. SFAS No. 5 requires treatment as a contingency until the outcome is probable and the amount of payment can be reasonable estimated, perhaps within a range. When the outcome becomes probable, i.e. the future event is likely to occur, and the firm can reasonably estimate the amount, using the lower end of a range if it can estimate only a range, then the firm recognizes a liability in the accounts, rather than just disclosing it. A material contingency may lead to a qualified, "subject to", auditor's opinion. Firms do not record gain contingencies in the accounts but merely disclose them in notes.

Contingent annuity

The contingent annuity is an annuity whose number of payments depends on the outcome of an event whose timing is uncertain at the time the annuity begins, e.g. an annuity payable until death of the annuitant. Contrast with "annuity certain".

Contingent liability

The contingent liability means the contingency. The use of this term should be avoided because it refers to something not yet a liability on the balance sheet.

Continuous budget

The continuous budget is a budget that adds a future period as the current period ends. This budget, then, always reports on the same number of periods.

Continuous compounding

The continuous compounding is the compound interest in which the compounding period is every instant of time. See "e" for the computation of the equivalent annual or periodic rate.

Continuous flow processing

The continuous flow processing is the mass production of homogeneous products in a continuous flow.

Continuous improvement

The continuous improvement reflects the assumption that the process of seeking quality is never completed, which is believed by the modern TQM practitioners, thereby making it necessary to seek always to improve activities.

Continuous inventory method

The continuous inventory method is the perpetual inventory method.

Contra-account

The contra-account is an account, such as the accumulated depreciation, that accumulates subtractions from another account, such as machinery. Contrast with "adjunct account".

Contributed capital

The contributed capital is the name for the owners' equity account that represents amounts paid in, usually in cash, by owners. It is the sum of the balance in the capital stock accounts plus the capital contributed in excess of par (or stated) value accounts.

Contribution approach

The contribution approach is the method of preparing income statements that reports contribution margin, by separating variable costs from fixed costs, in order to emphasize the importance of cost behavior patterns for purposes of planning and control.

Contribution margin

The contribution margin is the revenue from sales less all variable expenses. Contrast with "gross margin".

Contribution margin ratio

The contribution margin ratio is the contribution margin divided by the net sales and is usually measured from the price and the cost of a single unit. It is sometimes measured in total for companies with multiple products.

Contribution per unit

The contribution per unit is the selling price less variable costs per unit.

Control account

The control account, also called the controlling account, is a summary account with totals equal to those of entries and balances that appear in individual accounts in a subsidiary ledger. Accounts receivable is a control account backed up with an account for each customer. One should not change the balance in a control account unless one make a corresponding change in one of the subsidiary accounts.

Control charts

The control charts show the results of statistical process-control measures for a sample, batch, or some other unit.

Control system

The control system is a device used by top management to ensure that the lower-level management carries out its plans or to safeguard assets. The control designed for a single function within the firm is the operational control. The control designed for autonomous segments that generally have responsibility for both revenues and costs is the divisional control. The control designed for activities of the firm as a whole is the companywide control. Systems designed for safeguarding assets are the internal control systems.

Controllable cost

The controllable cost is a cost influenced by the way a firm carries out operations. For example, marketing executives control advertising costs. These costs can be fixed or variable. See also "programmed costs".

Controller

The controller, often spelled "comptroller", is a title for the chief accountant of an organization.

Conversion cost

The conversion cost is the direct labor costs plus the factory overhead costs incurred in producing a product, i.e. the cost to convert raw materials to the finished products. It is the component of the manufacturing cost.

Conversion period

The conversion period is the compounding period. It also means the period during which the holder of a convertible bond or convertible preferred stock can convert it into common shares.

Convertible bond

The convertible bond is a bond whose owner may convert it into a specified number of shares of capital stock during the conversion period.

Coproduct

The coproduct is a product sharing production facilities with another product. For example, if an apparel manufacturer produces shirts and jeans on the same line, these are coproducts. Distinguish coproducts from "joint products" and "by-products" that, by their very nature, a firm must produce together, such as the various grades of wood a lumber factory produces.

Copyright

The copyright is the exclusive right granted by the government to an individual author, composer, playwright, or the like for the life of the individual plus 50 years. If a firm receives the copyright, then the right extends 75 years after the original publication. The economic life of a copyright can be less than the legal life.

Corporation

The corporation is a legal entity authorized by a state to operate under the rules of the charter of an entity.

Cost

The cost is the sacrifice, measured by the price paid or required to be paid, to acquire goods and services. See "acquisition cost" and "replacement cost". Terminology often uses "cost" when referring to the valuation of a good or service acquired. In that sense, the cost means an asset. When the benefits of the acquisition, i.e. the goods or services acquired, expire, the cost becomes an expense or loss. The terms, "cost" and "expense", are, however, often used as synonymous. Contrast with "expense".

Cost accounting

The cost accounting is to classify, summarize, record, report, and allocate current or predicted costs and is a subset of the managerial accounting.

Cost Accounting Standards Board

See "CASB".

Cost accumulation

The cost accumulation is to bring together, usually in a single account, all costs of a specified activity. Contrast with "cost allocation".

Cost allocation

The cost allocation is to assign costs to individual products or time periods. Contrast with "cost accumulation".

Cost-based transfer price

The cost-based transfer price is a transfer price based on historical costs.

Cost behavior

The cost behavior is the functional relation between changes in activity and changes in cost, e.g. fixed versus variable costs and linear versus curvilinear costs.

Cost/benefit criterion

The cost/benefit criterion is some measure of costs compared with some measure of benefits for a proposed undertaking. If the costs exceed the benefits, then the analyst judges the undertaking not worthwhile. This criterion will not yield good decisions unless the analyst estimates all costs and benefits flowing from the undertaking.

Cost center

The cost center is a unit of activity for which a firm accumulates expenditures and expenses.

Cost driver

The cost driver is a factor that causes the costs of an activity. See "driver" and "activity basis".

Cost driver rates

The cost driver rates are the rates at which cost drivers drive or cause costs.

Cost-effective

The cost-effective is the one, among alternatives, whose benefit, or payoff, per unit of cost is the highest and is sometimes said of an action whose expected benefits exceed expected costs whether or not other alternatives exist with larger benefit-cost ratios.

Cost estimation

The cost estimation is the process of measuring the functional relation between changes in activity levels and changes in cost.

Cost flow assumption

See "flow assumption".

Cost-flow equation

The cost-flow equation indicates that the beginning balance plus the transfers in equal to the transfers out plus the ending balance.

Cost flows

The cost flows are the costs passing through various classifications within an entity.

Cost object

The cost object, also called the cost objective, is any activity for which management desires a separate measurement of costs. Examples include departments, products, and territories.

Cost of capital

The cost of capital is the opportunity cost of funds invested in a business and is the rate of return which rational owners require an asset to earn before they will devote that asst to a particular purpose. It is sometimes measured as the average rate per year a company must pay for its equities. In efficient capital markets, this cost is the discount rate that equates the expected present value of all future cash flows to common shareholders with the market value of common stock at a given time. Analysts often measure the cost of capital by taking a weighted average of the debt and various equity securities of a firm. This measurement should be called the composite cost of capital, which is sometimes confused with the cost of capital itself. For example, if the equities of a firm include substantial amounts for the deferred income tax liability, the composite cost of capital will underestimate the true cost of capital, which is the required rate of return on the assets of a firm, because the deferred income tax liability has no explicit cost.

Cost of goods manufactured

The cost of goods manufactured is the sum of all costs allocated to products completed during a period, including materials, labor, and overhead.

Cost of goods purchased

The cost of goods purchased is the net purchase price of goods acquired plus costs of storage and delivery to the place where the owner can productively use the items.

Cost of goods sold

The cost of goods sold is the inventoriable costs that firms expense because they sold the units. It is equal to the beginning inventory plus the cost of goods purchased or manufactured minus the ending inventory.

Cost of sales

The cost of sales generally refers to the cost of goods sold, occasionally to the selling expenses.

Cost-plus transfer pricing

The cost-plus transfer pricing is the transfer pricing policy based on the full costing or the variable costing and the actual cost or the standard cost plus an allowance for profit.

Cost pool

The cost pool is the groupings or aggregations of costs, usually for subsequent analysis. See "indirect cost pool".

Cost principle

The cost principle is the principle that requires reporting assets at historical or acquisition cost, less accumulated amortization. This principle relies on the assumption that the cost equals fair market value at the date of acquisition and that the subsequent changes are not likely to be significant.

Cost sheet

The cost sheet is the statement that shows all the elements composing the total cost of an item.

Cost structure

The cost structure is the percentages of fixed and variable costs for a given set of the total costs, typically two percentage points adding to 100 percent.

Cost-volume-profit analysis

The cost-volume-profit analysis, also called the cost-volume-profit model, is the study of the sensitivity of profits to changes in units sold (or produced), costs, or prices.

Cost-volume-profit graph

The cost-volume-profit graph, also called the cost-volume-profit chart, is a graph that shows the relation between the fixed costs, the contribution per unit, the break-even point, and the sales. See also "break-even chart".

Costing

The costing is the process of calculating the cost of activities, products, or services. It is also the British word for "cost accounting".

CPA

See "certified public accountant".

Cr

The word, "Cr", is the abbreviation for credit, always with initial capital letter.

Credit

The credit is, as a noun, an entry on the right-hand side of an account and, as a verb, means to make an entry on the right-hand side of an account. The credit records increases in liabilities, owners' equity, revenues, and gains and records decreases in assets and expenses. See also "debit and credit conventions". This term also refers to the ability or right to buy or borrow in return for a promise to pay later.

Creditor

The creditor is one who lends.

Critical Path Method

The Critical Path Method, or CPM, is a method of network analysis in which the analyst estimates normal duration time for each activity within a project. The critical path identifies the shortest completion period based on the most time-consuming sequence of activities from the beginning to the end of the network. Compare "PERT".

Critical success factors

The critical success factors are the factors important for the success of an organization.

Cross-reference

The cross-reference, also called the cross-reference index, is a number placed beside each account in a journal entry indicating the ledger account to which the record keeper posted the entry and placing in the ledger the page number of the journal where the record keeper first recorded the journal entry. It is used to link the debit and credit parts of an entry in the ledger accounts back to the original entry in the journal.

Cross-section analysis

The cross-section analysis is an analysis of financial statements of various firms for a single period of time. Contrast with "time-series analysis", in which analysts examine statements of a given firm for several periods of time.

Current assets

The current assets include cash, marketable securities, receivables, inventory, current prepayments, and other assets that a firm expects to turn into cash, sell, or exchange within the normal operating cycle of the firm or one year, whichever is longer. One year is the usual period for classifying asset balances on the balance sheet.

Current cost

The current cost is the cost stated in terms of current values of productive capacity rather than in terms of acquisition cost. See "net realizable value" and "current selling price".

Current cost accounting

The current cost accounting is the term of the FASB for financial statements in which the attribute measured is current cost.

Current liability

The current liability is a debt or other obligation that a firm must discharge within a short time, usually the earnings cycle or one year, normally by expending current assets.

Current ratio

The current ratio is the sum of current assets divided by the sum of current liabilities. See also "ratio".

Current replacement cost

The current replacement cost is the amount currently required to acquire an identical asset in the same condition and with the same service potential or an asset capable of rendering the same service at a current fair market price. If these two amounts differ, use the lower. Contrast with "reproduction cost".

Current selling price

The current selling price is the amount for which an asset could be sold as of a given time in an arm's-length transaction rather than in a forced sale.

Currently attainable standard cost

See "normal standard cost".

Curvilinear cost

The curvilinear cost, also called the curvilinear variable cost, is a continuous, but not necessarily linear, functional relation between activity levels and costs.

Customer response time

The customer response time is the amount of time from the point a customer places an order for a product or requests service to the point the firm delivers the product or service to the customer.

Customer-level activities

The customer-level activities are the activities performed to meet the needs of each customer.

Cutoff rate

See "hurdle rate".

Data bank

The data bank is an organized file of information, such as a customer name and address file, used in and kept up-to-date by a processing system.

Database

The database is a comprehensive collection of interrelated information stored together in computerized form to serve several applications.

Database management system

The database management system is the generalized software programs used to handle physical storage and manipulation of databases.

DCF

See "discounted cash flow".

Debit

The debit, as a noun, is an entry on the left-hand side of an account and, as a verb, means to make an entry on the left-hand side of an account. It records increases in assets and expenses and decreases in liabilities, owners' equity, and revenues. See also "debit and credit conventions".

Debit and credit conventions

The debit and credit conventions are the conventional use of the T-account form and the rules for debit and credit in balance sheet accounts. The equality of the two sides of the accounting equation results from recording equal amounts of debits and credits for each transaction. Revenue and expense accounts belong to the owners' equity group.

Debt

The debt is an amount owed and is the general name for notes, bonds, mortgages, and the like that provide evidence of amounts owed and have definite payment dates.

Debt capital

The debt capital is noncurrent liabilities. See also "debt financing" and contrast with "equity financing".

Debt-equity ratio

The dept-equity ratio is the total liabilities divided by the total equities. See also "ratio". Some analysts put only total shareholders' equity in the denominator. Some analysts restrict the numerator to long-term debt.

Debt financing

The debt financing means raising funds by issuing bonds, mortgages, or notes. Contrast with "equity finance". See also "leverage".

Debt ratio

See "debt-equity ratio".

Debt service payment

The debt service payment is the payment required by a lending agreement, such as the periodic coupon payments on a bond or the installment payment on a loan or a lease payment. It is sometimes called the interest payment, but this term will mislead unwary. Only rarely will the amount of a debt service payment equal the interest expense for the period preceding the payment. A debt service payment will always include some amount for interest, but the payment will usually differ from the interest expense.

Debt service requirement

The debt service requirement is the amount of cash required for payments of interest, current maturities of principal on outstanding debt, and payments to sinking funds (corporations) or to the debt service fund (governmental).

Debtor

The debtor is one who borrows.

Decentralize

Decentralizing, also called the decentralized decision making, means the management practice in which a firm gives a manager of a business unit responsibility for revenues and costs of that unit, freeing the manager to make decisions about prices, sources of supply, and the like, as though the unit was a separate business that the manager owns. See also "responsibility accounting" and "transfer price".

Defalcation

The defalcation means the embezzlement.

Default

The default is the failure to pay interest or principal on a debt when due.

Deferral

The deferral is the accounting process concerned with past cash receipts and payments. Contrast with "accrual". Some examples are to recognize a liability resulting from a current cash receipt as for magazines to be delivered in the future and to recognize an asset from a current cash payment as for prepaid insurance or a long-term depreciable asset.

Deferred annuity

The deferred annuity is an annuity whose first payment occurs sometime after the end of the first period.

Deferred charge

The deferred charge is the expenditure not recognized as an expense of the period when made but carried forward as an asset to be written off in future periods, such as for advance rent payments or insurance premium. See also "deferral".

Deficit

The deficit is a debit balance in the retained earnings account and is presented on the balance sheet in a contra-account to shareholders' equity. It is sometimes used to mean the negative net income for a period.

Deflation

The deflation is a period of declining general price changes.

Demand deposit

The demand deposit is the funds in a checking account at a bank.

Denominator volume

The denominator volume is the capacity measured in the number of units the firm expects to produce this period. When it is divided into budgeted fixed costs, the result is the fixed costs applied per unit of product.

Department allocation

The department allocation, also called the departmental allocation, is obtained by first accumulating costs in costs pools for each department and then, using separate rates or sets of rates for each department, allocating from each cost pool to products produced in that department.

Dependent variable

See "regression analysis".

Depletion

The depletion is the exhaustion or amortization of a wasting asset or natural resource.

Depreciable cost

The depreciable cost is the part of the cost of an asset, usually acquisition cost less salvage value, that the firm will charge off over the life of the asset through the process of depreciation.

Depreciable life

The depreciable life is the time period or units of activity such as miles driven for a truck over which the firm allocates the depreciable cost of an asset. For tax returns, depreciable, the life may be shorter than the estimated service life.

Depreciation

The depreciation is the amortization of plant assets and is the process of allocating the cost of an asset to the periods of benefit, i.e. the depreciable life. It is classified as a production cost or a period expense, depending on the asset and whether the firm uses full absorption or variable costing.

Descartes' rule of sign

The Descartes' rule of sign indicates that, in a capital budgeting context, a series of cash flows will have a nonnegative number of internal rates of return. The number equals the number of variations in the sign of the cash flow series or is less than that number by an even integer. See also "reinvestment rate".

Detective controls

The detective controls are the internal controls designed to detect, or maximize the chance of detection of, errors and other irregularities.

Determination

See "determine".

Determine

The term, determine, is used by accountants and whose who describe the accounting process and has the meaning of the verbs such as settle, decide, conclude, ascertain, cause, affect control, impel, terminate, and decide upon. In addition, accounting writers can mean any one of the verbs such as measure, allocate, report, calculate, compute, observe, choose, and legislate. In accounting, there are two distinct sets of meanings, those encompassed by the synonym "cause or legislate" and those encompassed by the synonym "measure". The first set of uses conveys the active notion of causing something to happen, and the second set of uses conveys the more passive notion of observing something that someone else has caused to happen. An accountant who speaks of cost or income determination generally means the measurement or observation, not causation. Management and economic conditions cause costs and income to be what they are. One who speaks of the accounting principles determination can mean choosing or applying (as in determining depreciation charges from an allowable set) or causing to be acceptable (as in determining the accounting for leases by FASB). In the long run, income is cash in less cash out, so management and economic conditions determine (cause) income to be what it is. In the short run, reported income is a function of accounting principles chosen and applied, so the accountant determines (measures) income. A question such as "who determines income?" has, therefore, no unambiguous answer. The meaning of "an accountant determining acceptable accounting principles" is also vague. It is suggested that the most specific verb rather than "determine" be used in order to convey meaning. "Determine" seldom best describes a process in which those who make decisions often differ from those who apply technique. However, the term, "predetermined overhead rate", contains an appropriate use of the word.

Diagnostic signal

See "warning signal" for definition and contrast.

Differentiable cost

The differentiable cost is the cost increments associated with infinitesimal changes in volume. If a total cost curve is smooth, or in mathematical terms, differentiable, then the curve graphing the derivative of the total cost curve shows differentiable costs.

Differential

The differential is an adjective used to describe the change in a cost, expense, investment, cash flow, revenue, profit, and the like as the firm produces or sells one or more additional (or fewer) units or undertakes (or ceases) an activity. This term has virtually the same meaning as incremental, but if the item declines, the term "decremental" better describes the change. Contrast with "marginal", which means the change in cost or other item for a small (one unit or even less) change in number of units produced or sold.

Differential analysis

The differential analysis is an analysis of differential costs, revenues, profits, investment, cash flow, and the like.

Differential cost

See "differential".

Direct access

The direct access is the access to computer storage where information can be located directly, regardless of its position in the storage file. Compare "sequential access".

Direct cost

The direct cost is the cost of direct material and direct labor incurred in producing a product. See also "prime cost". In some accounting literature, this term is used to mean the same thing as variable cost.

Direct costing

The direct costing is another, less-preferred, term for variable costing.

Direct labor cost

The direct labor cost is the cost of labor applied and assigned direct to a product. Contrast with "indirect labor".

Direct labor efficiency variance

The direct labor efficiency variance is the difference between actual quantity and standard quantity of labor used, times standard price.

Direct labor variance

The direct labor variance is the difference between actual and standard direct labor allowed.

Direct labor price variance

The direct labor price variance, also called the direct labor wage variance, is the difference between actual cost and standard cost of labor, times actual quantity.

Direct material cost

The direct material cost is the cost of material applied and assigned direct to a product. Contrast with "indirect material".

Direct materials variance

The direct materials variance is the difference between actual costs and the flexible budget for materials.

Direct method

See "statement of cash flows".

Direct posting

The direct posting is a method of bookkeeping in which the firm makes entries directly in ledger accounts, without using a journal.

Disbursement

The disbursement is the payment by cash or by check. See also "expenditure".

Disclaimer of opinion

The disclaimer of opinion is an auditor's report stating that the auditor cannot give an opinion on the financial statements. It usually results from material restrictions on the scope of the audit or from material uncertainties, which the firm has been unable to resolve by the time of audit, about the accounts.

Disclosure

The disclosure is the showing of facts in financial statements, notes thereto, or the auditor's report.

Discount

The discount is, in the context of compounded interest, bonds, and notes, the difference between face amount or future value and present value of a payment and, in the context of sales and purchase, a reduction in price granted for prompt payment. See also "quantity discount".

Discount factor

The discount factor is the reciprocal of one plus the discount rate to the power of the number of periods.

Discount rate

The discount rate is the interest rate used to convert future payments to present values.

Discounted bailout period

The discounted bailout period is, in a capital budgeting context, the total time that must elapse before discounted value of net accumulated cash flows from a project, including potential salvage value at various times of assets, equals or exceeds the present value of net accumulated cash outflows. Contrast with "discounted payback period".

Discounted cash flow

The discounted cash flow, or DCF, is a method using either the net present value or the internal rate of return in an analysis to measure the value of future expected cash expenditures and receipts at a common date. In DCF analysis, choosing the alternative with the largest internal rate of return may yield wrong answers given mutually exclusive projects with differing amounts of initial investment for two of the projects. Usage calls this shortcoming of choosing between alternatives based on the magnitude of the internal rate of return, rather than the magnitude of the net present value of the cash flows, the scale effect.

Discounted payback period

The discounted payback period is the shortest amount of time that must elapse before the discounted present value of cash inflows from a project, excluding potential salvage value, equals the discounted present value of the cash outflows.

Discovery sampling

The discovery sampling is the acceptance sampling in which the analyst accepts an entire population if and only if the sample contains no disparities.

Discretionary cost center

See "engineered cost center" for definition and contrast.

Discretionary costs

See "programmed cost".

Discussion Memorandum

The Discussion Memorandum is a neutral discussion of all the issues concerning an accounting problem of current concern to the FASB. The publication of such a document usually signals that the FASB will consider issuing an SFAS or SFAC on this particular problem. The Discussion Memorandum brings together material about the particular problem to facilitate interaction and comment by those interested in the matter. A public hearing follow before the FASB will issue an Exposure Draft.

Distributed processing

The distributed processing is the processing in a computer information network in which an individual location processes data relevant to it while the operating system transmits information required elsewhere, either to the central computer or to another local computer for further processing.

Distribution expense

The distribution expense is the expense of selling, advertising, and delivery activities.

Dividend

The dividend is a distribution of assets generated from earnings to owners of a corporation. A firm may distribute cash (cash dividend), stock (stock dividend), property, or other securities (dividend in kind). Dividends, except stock dividends, become a legal liability of the corporation when a board of the corporation declares them. Hence, the owner of stock ordinarily recognizes revenue when the board of the corporation declares the dividend, except for stock dividends.

Dividend yield

The dividend yield is the dividends declared for the year divided by the market price of the stock as of the time for which the analyst computes the yield.

Division

The division is a more or less self-contained business unit that is part of a larger family of business units under common control.

Division return on investment

The division return on investment, or the division ROI, is equal to the division operating profit divided by the division investment.

Divisional control

See "control system".

Dollar sign rules

The dollar sign rules indicate the placement of a dollar sign beside the first figure in each column and beside any figure below a horizontal line drawn under the preceding figure in accounting statements or schedules.

Double entry

The double entry is a system in recording transactions that maintains the equality of the accounting equation or the balance sheet. Each entry results in recording equal amounts of debits and credits.

Dr

The Dr is the abbreviation for debit, always with initial capital letter.

Driver

The driver, also called the cost driver, is a cause of costs incurred. Examples include order processing, issuing an engineering change order, changing the production schedule, and stopping production to change machine settings. The notion arises primarily in product costing, particularly activity-based costing.

Dual transfer prices

The dual transfer prices exist when the transfer price charged to the buying division differs from that credited to the selling division. Such prices make sense when the selling division has excess capacity and, as usual, the fair market value exceeds the incremental cost to produce the goods or services being transferred.

Duality

The duality is the axiom of double entry record keeping that every transaction must result in equal debit and credit amounts.

Dumping

The dumping is the situation where a foreign company sells a good or service in the US at a price below market price at home or, in some contexts, below some measure of cost. It is illegal in the US if the practice harms or threatens to harm an industry in the US.

e

The notation, "e", is the base of natural logarithms. If interest compounds continuously during a period at stated rate of r per period, then the effective interest rate is equivalent to interest compounded once per period at the rate of e to the power of r minus 1.

Earnings

The earnings are a term with no precise meaning, used to mean income or sometimes profit. When the FASB required firms to report comprehensive income, it encouraged firms to use the term "earnings" for the total formerly reported as net income.

Earnings cycle

The earnings cycle is the period of time that elapses for a given firm, or the series of transactions, during which the firm converts cash into goods and services, then sells goods and services to customers, and finally collects cash from customers. See also "cash cycle".

Economic depreciation

The economic depreciation is the decline in current cost or fair value of an asset during a period.

Economic entity

See "entity".

Economic life

The economic life is the time span over which the firm expects to receive the benefits of an asset. The economic life of a patent, copyright, or franchise may be less than the legal life. Contrast with "service life".

Economic order quantity

The economic order quantity, or EOQ, is, in mathematical inventory analysis, the optimal amount of stock to order when demand reduces inventory to a level called the reorder point. If A represents the incremental cost of placing a single order, D represents the total demand for a period of time in units, and H represents the incremental holding cost during the period per unit of inventory, then the economic order quantity is the square root of the product among 2, A, and D divided by H. Usage sometimes calls Q the optimal lot size.

Economic transfer pricing rule

The economic transfer pricing rule indicates the transfer at differential outlay cost plus opportunity cost.

Economic Value Added

The Economic Value Added, or EVA, is the annual after-tax operating profit minus the total annual cost of capital.

EDP

The EDP is the abbreviation for the electronic data processing.

Effective rate

The effective rate, also called the effective interest rate, is the internal rate of return or yield to maturity at the time of issue of a liability such as a bond. If the borrower issues the bond for a price below (above) par, the effective rate is higher (lower) than the coupon rate. In the context of compound interest, when the compounding period on a loan differs from one year, such as a nominal interest rate of 12 percent compounded monthly, the effective interest is the single rate that one could use at the end of the year to multiply the principal at the beginning of the year and give the same amount as results from compounding interest each period during the year.

Efficiency variance

The efficiency variance is a term used for the quantity variance for materials, labor, or variable overhead in a standard costing system.

Electronic data processing

The electronic data processing performs computations and other data-organizing steps in a computer, in contrast to doing these steps by hand or, several decades earlier, with mechanical calculators.

Emerging Issues Task Force

The Emerging Issues Task Force, or EITF, is a group convened by the FASB to deal more rapidly with accounting issues than the due-process procedures of the FASB can allow. The task force comprises about 20 members from public accounting, industry, and several trade associations. It meets every six weeks. Several FASB board members usually attend and participate. The chief accountant of the SEC has indicated that the SEC will require that published financial statements follow guidelines set by a consensus of the EITF. The EITF requires that nearly all its members agree on a position before that position receives the label of consensus. Such positions appear in Abstracts of the EITF, published by the FASB. Since 1984, the EITF has become one of the promulgators of GAAP.

Enabling costs

The enabling costs are a type of capacity cost that a firm will stop incurring if it shuts down operations completely but will incur in full if it carries out operations at any level. Examples include costs of a security force or of a quality control inspector for an assemble line. Contrast with "standby costs".

Ending inventory

The ending inventory is the cost of inventory on hand at the end of the accounting period, often called the closing inventory. Ending inventory from the end of one period becomes the beginning inventory for the next period.

Engineered cost center

The engineered cost center is the responsibility center with sufficiently well established relations between inputs and outputs that the analyst can predict the outputs given data on inputs or, conversely, given the outputs can estimate the amounts of inputs that the process should have used. Consider the relation between pounds of flour (input) and loaves of bread (output). Contrast to a discretionary cost center, where such relations are so imprecise that analysts have no reliable way to relate inputs to outputs. Consider the relation between advertising the corporate logo or trademark (input) and future revenues (output).

Engineered method

The engineered method, also called the engineered method of cost estimation, is a method to estimate unit cost of product from study of the materials, labor, and overhead components of the production process.

Enterprise

The enterprise is any business organization, usually defining the accounting entity.

Entity

The entity is a person, partnership, corporation, or other organization. The accounting entity that issues accounting statements may not be the same as the entity defined by law. For example, a sole proprietorship is an accounting entity, but the combined business and personal assets of an individual are the legal entity in most jurisdictions. Several affiliated corporations may be separate legal entities but issue consolidated financial statements for the group of companies operating as a single economic entity.

EOQ

See "economic order quantity".

EPVI

See "excess present value index".

Equities

The equities are the liabilities plus owners' equity. See also "equity".

Equity

The equity is a claim to assets and a source of assets. SFAC No. 3 defines equity as the residual interest in the assets of an entity that remains after deducting its liabilities. Thus, many people use "equity" to exclude liabilities and count only owners' equities. Some prefer to use the term to mean all liabilities plus all owners' equity.

Equity financing

The equity financing is to raise funds by issuing capital stock. Contrast with "debt financing".

Equity ratio

The equity ratio is the shareholders' equity divided by the total assets. See also "ratio".

Equivalent production

See "equivalent units".

Equivalent units

The equivalent units, also called the equivalent units of work and noted as EU, are the number of units of completed output that would require the same costs as a firm would actually incur for production of completed and partially completed units during a period. For example, if at the beginning of a period the firm starts 100 units and by the end of the period has incurred costs for each of these equal to 75 percent of the total costs to complete the unit, then the equivalent units of work for the period is 75. It is used primarily in process costing calculations to measure in uniform terms the output of a continuous process.

Escapable cost

See "avoidable cost".

Estimated liability

The estimated liability is the preferred terminology for estimated costs the firm will incur for such uncertain things as repairs under warranty. It appears on the balance sheet. Contrast with "contingency".

Estimation sampling

The estimation sampling is the use of sampling technique in which the sampler infers a qualitative (e.g. fraction female) or quantitative (e.g. mean weight) characteristic of the population from the occurrence of that characteristic in the sample drawn. See also "attributes sampling" and "variables sampling".

EU

See "equivalent units".

EVA

See "Economic Value Added".

Except for

The term, "except for", is the qualification in auditor's report, usually caused by a change, approved by the auditor, from one acceptable accounting principle or procedure to another.

Excess present value

The excess present value is, in a capital budgeting context, the present value of anticipated net cash inflows minus cash outflows including initial cash outflow for a project. The analyst uses the cost of capital as the discount rate.

Excess present value index

The excess present value index, or EPVI, is the present value of future cash inflows divided by the initial cash outlay.

Exchange

The exchange is the generic term for a transaction, or, more technically, a reciprocal transfer, between one entity and another. It is, in another context, the name for a market, such as the New York Stock Exchange.

Executory contract

The executory contract is a mere exchange of promises and is an agreement providing for payment by a payor to payee, such as a labor contract. Accounting does not recognize benefits arising from executory contracts as assets, nor does it recognize obligations arising from such contracts as liabilities.

Exit value

The exit value is the proceeds that would be received if assets were disposed of in an arm's-length transaction. It is the same as the current selling price.

Expectancy theory

The expectancy theory is an hypothesis that people will act so as to provide themselves with rewards they desire and prevent the penalties they wish to avoid.

Expected value

The expected value is the mean or arithmetic average of a statistical distribution or series of numbers.

Expected value of perfect information

The expected value of perfect information is the expected net benefits from an undertaking with perfect information minus expected net benefits of the undertaking without perfect information.

Expenditure

The expenditure is the payment of cash for goods or services received and the payment may occur at the time the purchaser receives the goods or services or at a later time. It is virtually synonymous with disbursement except that disbursement is a broader term and includes all payments for goods or services. Contrast with "expense".

Expense

The expense is, as a noun, a decrease in owners' equity accompanying the decrease in net assets caused by selling goods or rendering services or by the passage of a time, i.e. a gone (net) asset or an expired cost. It should be measured as the cost of the (net) assets used and should not be confused with expenditure or disbursement, which may occur before, when, or after the fir recognizes the related expense. The word "cost" should be used to refer to an item that still has service potential and is an asset. The word "expense" should be used after a firm has used the service potential of an asset. The expense means, as a verb, to designate an expenditure, which may be past, current, or future, as a current expense.

Exposure Draft

The Exposure Draft, or ED, is a preliminary statement of the FASB showing the contents of a pronouncement being considered for enactment by the board.

Experience curve

See "learning curve".

External failure costs

The external failure costs are the costs incurred when customers discover nonconforming products and services after delivery.

Extraordinary item

The extraordinary item is a material expense or revenue item characterized both by its unusual nature and by its infrequency of occurrence. It appears along with its income-tax effects separately from ordinary income and income from discontinued operations on the income statement. Accountants would probably classify a loss from an earthquake as an extraordinary item. Accountants treat gain or loss on the retirement of bonds as an extraordinary item under the terms of SFAS No. 4.

Extrinsic rewards

The extrinsic rewards are the rewards that come from outside the individual.

Face amount

The face amount, also called the face value, is the nominal amount due at maturity from a bond or note not including the contractual periodic payment that may also come due on the same date. Good usage calls the corresponding amount of a stock certificate, the par or stated value, whichever applies.

Facility-level activities

The facility-level activities are the activities that support the entire organization and are at the highest level of the cost hierarchy.

Factory

The factory is, as an adjective, used synonymously with the term, "manufacturing".

Factory burden

See "manufacturing overhead".

Factory cost

See "manufacturing cost".

Factory expense

See "manufacturing overhead". The term, "expense", is poor in this context because the item is a product cost.

Factory overhead

The factory overhead is usually an item of manufacturing cost other than direct labor or direct materials.

Fair market price

See "fair value".

Fair market value

See "fair value".

Fair presentation

The fair presentation, also called the fairness, is one of the qualitative standards of financial reporting. When the auditor's report says that the financial statements "present fairly ...", the auditor means that the accounting alternatives used by the entity all comply with GAAP. In recent years, however, courts have ruled that conformity with generally accepted accounting principles may be insufficient grounds for an opinion that the statements are fair. SAS No. 5 requires that the auditor judge the accounting principles used to be appropriate in the circumstances before attesting to fair presentation.

Fair value

The fair value, also called the fair market price or the fair market value, is the price or value negotiated at arm's length between a willing buyer and a willing seller, each acting rationally in his or her own self-interest. The accountant may estimate this amount in the absence of a monetary transaction. This is sometimes measured as the present value of expected cash flows.

FASAC

The FASAC is the abbreviation for the Financial Accounting Standards Advising Council.

FASB

The FASB, or the Financial Accounting Standards Board, is an independent board responsible, since 1973, for establishing generally accepted accounting principles. Its official pronouncements are Statements of Financial Accounting Concepts (SFAC), Statements of Financial Accounting Standards (SFAS), and FASB Interpretations. See also "Discussion Memorandum".

FASB Interpretation

The FASB Interpretation is an official statement of the FASB interpreting the meaning of Accounting Research Bulletins, APB Opinions, and Statements of Financial Accounting Standards.

Favorable variance

The favorable variance is an excess of actual revenues over expected revenues or is an excess of standard cost over actual cost.

Federal income tax

The federal income tax is the income tax levied by the US government on individuals and corporations.

Feedback

The feedback is the process of informing employees about how their actual performance compares with the expected or desired level of performance in the hope that the information will reinforce desired behavior and reduce unproductive behavior.

FICA

The FICA, or the Federal Insurance Contributions Act, is the law that sets Social Security taxes and benefits.

Fiduciary

The fiduciary is someone responsible for the custody or administration of property belonging to another. It acts as an executor of an estate, agent, receiver in bankruptcy, or trustee of a trust.

FIFO

The FIFO, or the first-in first-out, is the inventory flow assumption that firms use to compute ending inventory cost from most recent purchases and cost of goods sold from oldest purchases including beginning inventory. The FIFO describes cost flow from the viewpoint of the income statement. From the balance sheet perspective, the LISH, or the last-in still-there, describes this same cost flow. Contrast with "LIFO".

Finance

The finance is, as a verb, to supply with funds through the issue of stocks, bonds, notes, or mortgages or through the retention of earnings.

Financial accounting

The financial accounting is the accounting for assets, equities, revenues, and expenses of a business. It is primarily concerned with the historical reporting of the financial position and operations of an entity to external users on a regular, periodic basis. Contrast with "managerial accounting".

Financial Accounting Foundation

The Financial Accounting Foundation is the independent foundation (committee) that raises funds to support the FASB and GASB.

Financial Accounting Standards Advisory Council

The Financial Accounting Standards Advisory Council, or FASAC, is a committee of academics, preparers, attestors, and users giving service to the FASB on matters of strategy and emerging issues. The council spends much of each meeting learning about current developments in standard setting from the FASB staff.

Financial Accounting Standards Board

See "FASB".

Financial Executives Institute

The Financial Executives Institute, or FEI, is an organization of financial executives, such as chief accountants, controllers, and treasurers, of large businesses. In recent years, the FEI has been a critic of the FASB because it views many of the FASB requirements as burdensome while not cost-effective.

Financial expense

The financial expense is an expense incurred in raising or managing funds.

Financial model

The financial model is a model that enables an organization to test the interaction of economic variables in a variety of settings.

Financial statements

The financial statements consist of the balance sheet, income statement, statement of retained earnings, statement of cash flows, statement of changes in owners' equity accounts, and note thereto.

Financial structure

See "capital structure".

Financial vice-president

The financial vice-present is a person in charge of the entire accounting and finance function and is typically one of the three most influential people in a company.

Financing activities

The financing activities mean to obtain resources (1) from owners and providing them with a return on and a return of their investment and (2) from creditors and repaying amounts borrowed or otherwise settling the obligation. See also "statement of cash flows".

Financing lease

See "capital lease".

Finished goods

The finished goods are the manufactured product ready for sale and are the current asset account.

Firm

The firm is, informally, any business entity, but strictly speaking, it is a partnership.

First-in first-out

See "FIFO".

Fiscal year

The fiscal year is a period of twelve consecutive months chosen by a business as the accounting period for annual reports, not necessarily a natural business year or a calendar year.

Fixed assets

See "plant assets".

Fixed asset turnover

The fixed asset turnover is the sales divided by the average total fixed assets.

Fixed budget

The fixed budget is a plan that provides for specified amounts of expenditures and receipts that do not vary with activity levels and is sometimes called the strategic budget. Contrast with "flexible budget".

Fixed charges earned ratio

The fixed charges earned ratio, also called the fixed charges coverage ratio, is the income before interest expense and income tax expense divided by interest expense.

Fixed cost

The fixed cost, also called the fixed expense, is an expenditure or expense that does not vary with volume of activity, at least in the short run. See "capacity costs", which include enabling costs and standby costs, and "programmed costs" for various subdivisions of fixed costs.

Fixed interval sampling

The fixed interval sampling is a method of choosing a sample in which the analyst selects the first item from the population randomly, with the remaining sample items drawn at equally spaced intervals.

Fixed liability

See "long-term liability".

Fixed manufacturing overhead applied

The fixed manufacturing overhead applied is the portion of fixed manufacturing overhead cost allocated to units produced during a period.

Fixed overhead variance

The fixed overhead variance is the difference between actual fixed manufacturing costs and fixed manufacturing costs applied to production in a standard costing system.

Flexible budget

The flexible budget is the budget that projects receipts and expenditures as a function of activity levels. Contrast with "fixed budget".

Flexible budget allowance

The flexible budget allowance is, with respect to manufacturing overhead, the total cost that a firm should have incurred at the level of activity actually experienced during the period.

Flow

The flow is the change in the amount of an item over time. Contrast with "stock".

Flow assumption

The flow assumption is an assumption used when the firm makes a withdrawal from inventory. The firm must compute the cost of the withdrawal by a flow assumption if the firm does not use the specific identification method. The usual flow assumptions are FIFO, LIFO, and weighted average.

Flow of costs

The flow of costs is the costs passing through various classifications within an entity engaging, at least in part, in manufacturing activities.

Footing

The footing means to add a column of figures.

Footnotes

The footnotes, sometimes called the notes, are more detailed information than that provided in the income statement, balance sheet, statement of retained earnings, and statement of cash flows. These are an integral part of the statements, and the auditor's report covers them.

Forward price

The forward price is the price of a commodity for delivery at a specified future date. In contrast to the spot price, it is the price of that commodity on the day of the price quotation.

Franchise

The franchise is a privilege granted or sold, such as to use a name or to sell products or services.

Fraudulent financial reporting

The fraudulent financial reporting is the intentional or reckless conduct that results in materially misleading financial statements.

Free cash flow

The free cash flow is the term of financial statement analysts meaning the cash flow from operations plus interest expense plus income tax expense.

Full absorption costing

The full absorption costing is the costing method that assigns all types of manufacturing costs, which consist of the direct material, direct labor, and fixed and variable overhead, to usits produced. It is required by GAAP and is also called the absorption costing. Contrast with "variable costing".

Full costing

The full costing, also called the full costs, is the total cost of producing and selling a unit and is often used in the long-term profitability and pricing decisions. The full cost per unit equals the full absorption cost per unit plus marketing, administrative, interest, and other central corporate expenses, per unit. The sum of full costs for all units equals total costs of the firm.

Full disclosure

The full disclosure is the reporting policy requiring that all significant or material information appear in the financial statements.

Fully diluted earnings per share

The fully diluted earnings per share is the smallest earnings per share figure on common stock that one can obtain by computing an earnings per share for all possible combinations of assumed exercise or conversion of potentially dilutive securities. This figure must appear on the income statement if it is less than 97 percent of earnings available to common shareholders divided by the average number of common shares outstanding during the period.

Function

The function is, in mathematics, a rule for associating a number, called the dependent variable, with another number (or numbers), called the independent variable(s).

Funding

The funding means to replace short-term liabilities with long-term debt.

Funds

The funds generally refer to the working capital, which is the current assets less current liabilities. This term is sometimes used to refer to cash or to cash and marketable securities.

Funds provided by operations

See "cash provided by operations".

FUTA

The FUTA, or the Federal Unemployment Tax Act, provides for taxes to be collected at the federal level to help subsidize the administration of individual states with their unemployment compensation programs.

Future value

The future value is the value at a specified future date of a sum increased at a specified interest rate.

GAAP

See "generally accepted accounting principles".

GAAS

See "generally accepted auditing standards".

Gain

The gain is the increase in owners' equity caused by a transaction that is not part of the typical, day-to-day operation of a firm or not part of owners' investment or withdrawals. Accounting distinguishes the meaning of the term "gain" (or "loss") from that of related terms. First, gains (losses) generally refer to nonoperating, incidental, or nonroutine transactions. Second, gains (losses) are net concepts, not gross concepts, i.e. a gain (loss) results from subtracting some measure of cost from the measure of inflow. Revenues and expenses, on the other hand, are gross concepts and their difference is a net concept. Gains are nonroutine and net. Profits or margins are routine and net. Revenues from continuing operations are routine and gross. Revenues from discontinued operations are nonroutine and gross. Losses are net but can be either routine (e.g. loss on sale of inventory) or not (e.g. loss on disposal of segment of business).

GAS

See "goods available for sale".

GASB

The GASB, or the Governmental Accounting Standards Board, is an independent body responsible since 1984 for establishing accounting standards for state and local government units. It is part of the Financial Accounting Foundation, parallel to the FASB, and currently consists of five members.

General expenses

The general expenses are the operating expenses other than those specifically identified as cost of goods sold, selling, and administration.

Generally accepted accounting principles

The generally accepted accounting principles, or the GAAP, are, as defined by the FASB, the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. It includes both broad guidelines and relatively detailed practices and procedures. In the US, the FASB defines GAAP to include accounting pronouncements of the SEC and other government agencies as well as a variety of authoritative sources.

Generally accepted auditing standards

The generally accepted auditing standards, or the GAAS, are the standards, as opposed to particular procedures, that are promulgated by the AICPA in Statements on Auditing Standards and that concern the auditor's professional quantities and the judgment exercised by him in the performance of his examination and in his report. Currently, there are ten such standards: three general ones concerned with proficiency, independence, and degree of care to be exercised, three standards of field work, and four standards of reporting. The first standard of reporting requires that the auditor's report state whether the firm prepared the financial statements in accordance with generally accepted accounting principles. Thus, the typical auditor's report says that the auditor conducted the examination in accordance with generally accepted auditing standards and that the firm prepared the statements in accordance with generally accepted accounting principles. See also "auditor's report".

Goal congruence

The goal congruence is the idea that all members of an organization have incentives to perform for a common interest, such as shareholder-wealth maximization for a corporation.

Going-concern assumption

The going-concern assumption is the assumption by accountants for accounting purposes that a business will remain in operation long enough to carry out all its current plans. This assumption partially justifies the acquisition cost basis, rather than a liquidation or exit value basis, of accounting.

Going public

Going public is said of a business when its shares become widely traded rather than being closely held by relatively few shareholders and means to issue shares to the general investing public.

Goods

The goods are items of merchandise, supplies, raw materials, or finished goods. Sometimes, the meaning of goods is extended to include all tangible items, as in the phrase "goods and services".

Goods available for sale

The goods available for sale are the sum of beginning inventory plus all acquisitions of merchandise or finished goods during an accounting period.

Goods in process

See "work in process".

Goodwill

The goodwill is the portion of the cost of an acquired firm or operating unit in excess of the current fair market value of the separately identifiable net assets of the acquired unit. Before the acquiring firm can recognize goodwill, it must assign a fair market value to all identifiable assets, even when not recorded on the books of the acquired unit. Informally, the term indicates the value of good customer relations, high employee morale, a well-respected business name, and so on, all of which the firm or analyst expects to result in greater-than-normal earning power.

Governmental Accounting Standards Board

See "GASB".

Gross

The gross means what is not adjusted or reduced by deductions or subtractions. Contrast with "net" and see "gain" for description of how the difference between "net" and "gross" affects usage of the terms "revenue", "gain", "expense", and "loss".

Gross margin

The gross margin is the net sales minus cost of goods sold.

Gross margin percent

The gross margin percent is calculated as the gross margin divided by the net sales multiplied by 100.

Gross profit

See "gross margin".

Gross profit ratio

The gross profit ratio is calculated as the gross margin divided by the net sales.

Gross sales

The gross sales are all the sales at invoice prices, not reduced by discounts, allowances, returns, or other adjustments.

Guarantee

The guarantee is a promise to answer for payment of debt or performance of some obligation if the person liable for the debt or obligation fails to perform. A guarantee is a contingency of the entity making the promise. The terms "guarantee" and "warranty" are often used to mean the same thing. In precise usage, however, "guarantee" means a promise to fulfill the promise of some person to perform a contractual obligation such as to pay a sum of cash, whereas "warranty" refers to promises about pieces of machinery or other products. See also "warranty".

Hardware

The hardware is the physical equipment or devices forming a computer and peripheral equipment.

Hash total

The hash total is used to establish accuracy of data processing and is a control that takes the sum of data items not normally added together (e.g. the sum of a list of part numbers) and subsequently compares that sum with a computer-generated total of the same values. If the two sums are identical, then the analyst takes some comfort that two lists are identical.

Hasselback

The Hasselback is an annual directory of accounting faculty at colleges and universities and gives information about the training of the faculty and the fields of specialization. James R. Hasselback of Florida State University has compiled the directory since the 1970's. Prentice-Hall distributes it.

Historical cost

The historical cost is the acquisition cost, the original cost, and the sunk cost.

Historical summary

The historical summary is a part of the annual report to shareholders that shows items, such as net income, revenue, expense, asset and equity totals, earnings per share, and the like, for five or ten periods including the current one. Usually, not as much detail appears in the historical summary as in comparative statements, which typically report as much detail for the two preceding years as for the current year. Annual reports may contain both comparative statements and a historical summary.

Holding gain or loss

The holding gain or loss is the difference between end-of-period price and beginning-of-period price of an asset held during the period. The financial statements ordinary do not separately report realized holding gains and losses. Income does not usually report unrealized gains at all, except on trading securities. See also "lower of cost or market". Refer to "inventory profit" for further refinement.

Horizontal analysis

See "time-series analysis".

Horizontal integration

The horizontal integration is the extension of activity by an organization in the same general line of business or expansion into supplementary, complementary, or compatible products. Compare "vertical integration".

Human resource accounting

The human resource accounting is a term used to describe a variety of proposals that seek to report the importance of human resource, i.e. the knowledgeable, trained, and loyal employees, in the earning process and total assets of a company.

Hurdle rate

The hurdle rate is the required rate of return in a discounted cash flow analysis.

I

The notation "I" means the identity matrix.

IASC

See "International Accounting Standards Committee".

ICMA

The ICMA is the abbreviation for the Institute of Certified Management Accountants. See also "CMA" and "Institute of Management Accountants".

Ideal standard costs

The ideal standard costs are the standard costs set equal to those that a firm would incur under the best possible conditions.

Identity matrix

The identity matrix, or I, is a square matrix with ones on the main diagonal and zeros elsewhere.

IIA

See "Institute of Internal Auditors".

IMA

See "Institute of Management Accountants".

Impairment

The impairment is a reduction in market value of an asset. When a firm has information indicating that its long-lived assets, such as plant, identifiable intangibles, and goodwill, have declined in market value or will provide a smaller future benefit than originally anticipated, it tests to see if the decline in value is so drastic that the expected future cash flows from the asset have declined below book value. If then-current book value exceeds the sum of expected cash flows, an asset impairment has occurred. At the time the firm judges that an impairment has occurred, the firm writes down the book value of the asset to its then-current fair value, which is the market value of the asset or, if the firm cannot assess the market value, the expected net present value of the future cash flows.

Implicit interest

The implicit interest is an interest not paid or received. See "interest, imputed". All transactions involving the deferred payment or receipt of cash involve interest, whether explicitly stated or not. The implicit interest on a single-payment note equals the difference between the amount collected at maturity and the amount lent at the start of the loan. One can compute the implicit interest rate per year for loans with a single cash inflow and a single cash outflow from the equation of the cash received at maturity divided by the cash lent to the power of minus t less one.

Imputed cost

The imputed cost is a cost that does not appear in accounting records, such as the interest that a firm could earn on cash spent to acquire inventories rather than, say, government bonds. Or, consider a firm that owns the buildings it occupies. This firm has an imputed cost for rent in an amount equal to what it would have to pay to use similar buildings owned by another or to the amount it could collect from someone else who rents the same premises from the firm. It is an opportunity cost.

Imputed interest

See "interest, imputed".

In the black

The expression "in the black" means to operate at a profit.

In the red

The expression "in the red" means to operate at a loss.

Incentive-compatible compensation

The incentive-compatible compensation is said of a compensation plan that induces managers to act for the interests of owners while acting also in their own interests. For example, consider a time of rising prices and increasing inventories when using a LIFO cost flow assumption implies paying lower income taxes than using FIFO. A bonus scheme for managers based on accounting net income is not incentive compatible because owners likely benefit more under LIFO, whereas managers benefit more if they report using FIFO. See also "LIFO conformity rule" and " goal congruence".

Income

The income is the excess of revenues and gains over expenses and losses for a period.

Income accounts

The income accounts mean the revenue and expense accounts.

Income before taxes

The income before taxes is the difference on the income statement between all revenues and expenses except income tax expense. Contrast with "net income".

Income determination

See "determine.

Income smoothing

The income smoothing is a method of timing business transactions or choosing accounting principles so that the firm reports smaller variations in income from year to year than it otherwise would. Although some managements set income smoothing as an objective, no standard setter does.

Income statement

The income statement is the statement of revenues, expenses, gains, and losses for the period, ending with the net income for the period. Accountants usually show the earnings-per-share amount on the income statement. The reconciliation of beginning and ending balances of the retained earnings may also appear in a combined statement of income and retained earnings.

Income tax

The income tax is an annual tax levied by the federal and other governments on the income of an entity.

Incremental

The term "incremental" is an adjective used to describe the increase in cost, expense, investment, cash flow, revenue, profit, and the like if the firm produces or sells one or more units or if it undertakes an activity. See also "differential".

Incremental cost

See "incremental".

Incur

Incurring is said of an obligation of a firm, whether or not that obligation is accrued. For example, a firm incurs interest expense on a loan as time passes but accrues that interest only on payment dates or when it makes an adjusting entry.

Independence

The independence is the mental attitude required of the CPA in performing the attest function. It implies that the CPA is impartial and that the members of the auditing CPA firm own no stock in the corporation being audited.

Independent accountant

The independent accountant is the CPA who performs the attest function for a firm.

Independent variable

See "regression analysis".

Indirect cost pool

The indirect cost pool is any grouping of individual costs that a firm does not identify with a cost objective.

Indirect costs

The indirect costs are the costs of production not easily associated with the production of specific goods and services. Accountants may allocate them on some arbitrary basis to specific products or departments.

Indirect labor cost

The indirect labor cost is an indirect cost for labor, such as for supervisors.

Indirect material cost

The indirect material cost is an indirect cost for material, such as for supplies.

Indirect method

See "statement of cash flows".

Inescapable cost

The inescapable cost is a cost that the firm or manager cannot avoid because of an action. See "avoidable cost". For example, if management shuts down two operating rooms in a hospital but still must employ security guards in unreduced numbers, the security costs are inescapable with respect to the decision to close the operating rooms.

Inflation

The inflation is a time of generally rising prices.

Information system

The information system is a system, sometimes formal and sometimes informal, for collecting, processing, and communicating data that are useful for the managerial functions of decision making, planning, and control and for financial reporting under the attest requirement.

Initial cash flows

The initial cash flows are the cash flows occurring at the beginning of the project.

Installment

The installment is the partial payment of a debt or partial collection of a receivable, usually according to a contract.

Institute of Certified Management Accountants

See "CMA" and "Institute of Management Accountants".

Institute of Internal Auditors

The Institute of Internal Auditors, or IIA, is the national association of accountants who are engaged in internal auditing and are employed by business firms. It administers a comprehensive professional examination. Those who pass the exam qualify to be designated Certified Internal Auditor, or CIA.

Institute of Management Accountants

The Institute of Management Accountants, or IMA, is what was formerly the National Association of Accountants, or NAA. It is a society open to those engaged in management accounting and is a parent organization of the ICMA, which oversees the CMA program.

Insurance

The insurance is a contract for reimbursement of specific losses and is purchased with insurance premiums. "Self-insurance" is not insurance but is merely a willingness of the noninsured to assume the risk of incurring losses while saving the premium.

Intangible asset

The intangible asset is a nonphysical, noncurrent right that gives a firm an exclusive or preferred position in the marketplace. Examples are copyright, patent, trademark, goodwill, organization costs, capitalized advertising cost, computer programs, licenses for any of the preceding, government licenses (e.g. broadcasting or the right to sell liquor), leases, franchises, mailing lists, exploration permits, import and export permits, construction permits, and marketing quotas. Commonly, accountants define "intangible" with a "for example" list, because accounting has been unable to devise definition of "intangible" that will include items such as those listed above but exclude stock and bond certificates. Accountants classify these items as tangibles, even though they give their holders a preferred position in receiving dividends and interest payments.

Intercompany transaction

The intercompany transaction is a transaction between parent company and subsidiary or between subsidiaries in a consolidated entity. Accountants must eliminate the effects of such a transaction when preparing consolidated financial statements.

Intercorporate investment

The intercorporate investment means that a given corporation owns shares or debt issued by another.

Interdepartment monitoring

The interdepartment monitoring is an internal control device and is an advantage of allocating service department costs to production departments stems from the incentives it gives those charged with the costs to control the costs incurred in the service department. That process of having one group monitor the performance of another is interdepartment monitoring.

Interest

The interest is the charge or cost for using cash, usually borrowed funds. Interest on one's own cash used is an opportunity cost, or an imputed cost. The amount of interest for a loan is the total amount paid by a borrower to a lender less the amount paid by the lender to the borrower. Accounting seeks to allocate that interest over the time of the loan so that the interest rate, which is the interest charge divided by the amount borrowed, stays constant each period. See "interest rate" for discussion of quoted amount. See also "effective interest rate" and "nominal interest rate".

Interest, imputed

The interest, imputed, is the difference between the face amount and present value of a promise. If a borrower merely promises to pay a single amount, sometime later than the present, then the face amount the borrower will repay at maturity will exceed the present value of the promise that is computed at a fair market interest rate, called the "imputed interest rate". See also "imputed cost".

Interest factor

The interest factor is the interest rate plus one.

Interest rate

The interest rate is a basis used for computing the cost of borrowing funds usually expressed as a ratio per period of time between the number of currency units, e.g. dollars, charged per number of currency units borrowed for that same period of time. When a period is not specifically stated, a period of one year is almost always presumed.

Internal audit

The internal audit is an audit conducted by employees of a firm, called "internal auditors", to ascertain whether the internal control procedures of the firm work as planned.

Internal controls

The internal controls are policies and procedures designed to provide management with reasonable assurances that employees behave in a way that enables the firm to meet its organizational goals. See also "control system".

Internal failure costs

The internal failure costs are the costs incurred when the firm discovers nonconforming products and services before delivery.

Internal rate of return

The internal rate of return, or IRR, is the discount rate that equates the net present value of a stream of cash outflows and inflows to zero.

Internal reporting

The internal reporting is the reporting for the use of management in planning and control.

Internal Revenue Service

The Internal Revenue Service, or IRS, is the agency of the US Treasury Department responsible for administering the Internal Revenue Code and collecting income and certain other taxes.

International Accounting Standards Committee

The International Accounting Standards Committee, or IASC, is an organization that promotes the international harmonization of accounting standards.

Interpolation

The interpolation is the estimation of an unknown number intermediate between two or more known numbers.

Intrinsic rewards

The intrinsic rewards are the rewards that come from within the individual.

Inventoriable costs

The inventoriable costs are the costs incurred that a firm adds to the cost of manufactured products and are the costs (assets) as opposed to period expenses.

Inventory

The inventory is, as a noun, the balance in an asset account such as raw materials, supplies, work in process, and finished goods and, as a verb, to calculate the cost of goods on hand at a given time or to count items on hand physically.

Inventory equation

The inventory equation states the beginning inventory plus net additions minus withdrawals equal to the ending inventory. Ordinarily, the additions are net purchases, and withdrawals are the cost of goods sold. Notice that the ending inventory, appearing on the balance sheet, and the cost of goods sold, appearing on the income statement, must add to a fixed sum. The larger is one and the smaller must be the other. In valuing inventories, a firm usually knows beginning inventory and the net purchases. Some inventory methods (e.g. some applications of the retail inventory method) measure costs of goods sold and use the equation to find the cost of ending inventory. Most methods measure cost of ending inventory and use the equation to find the cost of goods sold, or the withdrawals.

Inventory profit

The inventory profit is a term with several possible meanings. A firm uses a FIFO cost flow assumption and derives its historical cost data. The assumed current cost data resemble those that the FASB suggested in SFAS No. 89. The term "income from continuing operations" refers to revenues less expenses based on current, rather than historical, costs. To that subtotal, add realized holding gains to arrive at realized (conventional) income. To that, add unrealized holding gains to arrive at economic income. The term "inventory profit" often refers (e.g. in some SEC releases) to the realized holding gain. The amount of inventory profit will usually be material when the firm uses FIFO and when prices rise. Other analysts prefer to use the term "inventory profit" to refer to the total holding gain, both realized and unrealized. In periods of rising prices and increasing inventories, the realized holding gains under a FIFO cost flow assumption will exceed those under LIFO. The cost flow assumption has a real effect on how to split the total holding gain into realized and unrealized holding gain. The economic income does not depend on the cost flow assumption.

Inventory turnover

The inventory turnover is the number of times a firm sells the average inventory during a period and is calculated as the cost of goods sold for a period divided by the average inventory for the period. See also "ratio".

Investing activities

The investing activities are to lend funds and collecting principal (but not interest, which is an operating activity) on those loans and to acquire and sell securities or productive assets expected to produce revenue over several periods.

Investment

The investment is an expenditure to acquire property or other assets in order to produce revenue and is the asset so acquired. It is the current expenditure made in anticipation of future income and is said of securities of other companies held for the long term and appearing in a separate section of the balance sheet. Contrast with "marketable securities".

Investment center

The investment center is a responsibility center, with control over revenues, costs, and assets.

Investment decision

The investment decision is the decision whether to undertake an action involving production of goods or services.

Investment turnover ratio

The investment turnover ratio is a term that means the same thing as total assets turnover ratio. It is sometimes used for a division, something less than the entire firm.

Investments

The investments are a balance sheet heading for tangible assets held for periods longer than the operating cycle and not used in revenue production (assets not meeting the definitions of current assets or property, plant, and equipment).

Invoice

The invoice is a document showing the details of a sale or purchase transaction.

IOU

The IOU is an informal document acknowledging a debt, setting out the amount of the debt and bearing the signature of debtor.

IRR

See "internal rate of return".

IRS

See "Internal Revenue Service".

Isoprofit line

The isoprofit line is a line showing all feasible production possibility combinations with the same profit or, perhaps, contribution margin drawn on a graph showing feasible production possibilities of two products that require the use of the same, limited resources.

Issue

The issue is a corporation exchange of its stock or bonds for cash or other assets. Terminology says the corporation "issues", not "sells", that stock or bonds. It is also used in the context of withdrawing supplies or materials from inventory for use in operations and of drawing a check.

JIT

See "just-in-time inventory".

Job

The job is a customized product.

Job cost sheet

The job cost sheet is a schedule showing actual or budgeted inputs for a special order.

Job costing

The job costing, also called the job-order costing, is the accumulation of costs for a particular identifiable batch of product, known as a job, as it moves through production.

Joint cost

The joint cost is the cost of simultaneously producing or otherwise acquiring two or more products, called joint products, that a firm must, by the nature of the process, produce or acquire together, such as the cost of beef and hides of cattle. Generally, accounting allocates the joint costs of production to the individual products in proportion to their respective sales value (or, sometimes and usually not preferred, their respective physical quantities) at the split-off point. Other examples include central corporate expenses and overhead of a department when it manufactures several products.

Joint cost allocation

See "joint cost".

Joint product

The joint product is one of two or more outputs with significant value produced by a process that a firm must produce or acquire simultaneously. See "by-product" and "joint cost".

Journal

The journal is the place where the firm records transactions as they occur. It also refers to the book of original entry.

Judgmental sampling

The judgmental sampling is a method of choosing a sample in which the analyst subjectively selects items for examination, in contrast to selecting them by statistical methods. Compare "random sampling".

Just-in-time inventory

The just-in-time inventory, or JIT, is the system in managing inventory for manufacturing in which a firm purchases or manufactures each component just before the firm uses it. Contrast with systems in which firms acquire or manufacture many parts in advance of needs. JIT systems have much smaller carrying costs for inventory, ideally none, but run higher risks of incurring stockout costs.

k

The notation "k" means the two to the tenth power, or 1,024, when referring to computer storage capacity. The one-letter abbreviation derives from the first letter of the prefix "kilo", which means 1,000 in decimal notation.

Kaizen costing

The kaizen costing is a management concept that seeks continuous improvements, likely occurring in small, incremental amounts, by refinements of all components of a production process.

Labor variances

The labor variances are the price (or rate) and quantity (or usage) variances for direct labor inputs in a standard costing system.

Lapping

The lapping is the theft, by an employee, of cash sent in by a customer to discharge the latter's payable. The employee conceals the theft from the first customer by using cash received from a second customer. The employee conceals the theft from the second customer by using cash received from a third customer, and so on. The process continues until the thief returns the funds or can make the theft permanent by creating a fictitious expense or receivable write-off or until someone discovers the fraud.

Lead time

The lead time is he time that elapses between placing an order and receiving the goods or services ordered.

Learning curve

The learning curve, also known as the experience curve, is a mathematical expression of the phenomenon that incremental unit costs to produce decrease as managers and labor gain experience from practice.

Lease

The lease is a contract calling for the lessee (user) to pay the lessor (owner) for the use of an asset. A cancelable lease allows the lessee to cancel at any time. A noncancelable lease requires payments from the lessee for the life of the lease and usually shares many of the economic characteristics of debt financing.

Least and latest rule

The least and latest rule means paying the least amount of taxes as late as possible within the law to minimize the present value of tax payments for a given set of operations. Sensible taxpayers will follow this rule. When a taxpayer knows that tax rates will increase later, the taxpayer may reduce the present value of the tax burden by paying smaller taxes sooner. Each set of circumstances requires its own computations.

Ledger

The ledger is a book of accounts, the book of final entry. Contrast with "journal".

Leverage

The leverage means the situation where some measure of output increases faster than the measure of input. "Operating leverage" refers to the tendency of net income to rise at a faster rate than sales in the presence of fixed costs. A doubling of sales, for example, usually implies a more than doubling of net income. "Financial leverage", or "capital leverage", refers to an increase in rate of return larger than the increase in explicit financing costs - the increased rate of return on owners' equity (see "ratio") when an investment earns a return larger than the after-tax interest rate paid for debt financing. Because the interest charges on debt usually do not change, any incremental income benefits owners and none benefits debtors. The term "leverage" is often used to refer to the financial leverage, the use of long-term debt in securing funds for the entity.

Liability

The liability is an obligation to pay a definite (or reasonable definite) amount at a definite (or reasonably definite) time in return for a past or current benefit (that is, the obligation arises from a transaction that is not an executory contract). It is also a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or to provide services to other entities in the future as a result of past transactions or events. The FASB says that "probable" refers to that which we can reasonably expect or believe but that is neither certain nor proved. A liability has three essential characteristics: (1) the obligation to transfer assets or services has a specified or knowable date, (2) the entity has little or no discretion to avoid the transfer, and (3) the event causing the obligation has already happened, that is, it is not executory.

LIFO

The LIFO, or last-in, first-out, is an inventory flow assumption in which the cost of goods sold equals the cost of the most recently acquired units and a firm computes the ending inventory cost from the costs of the oldest units. In periods of rising prices and increasing inventories, LIFO leads to higher reported expenses and therefore lower reported income and lower balance sheet inventories than does FIFO. Contrast with "FIFO". See also "inventory profit".

LIFO conformity rule

The LIFO conformity rule is the IRS rule requiring that companies that use a LIFO cost flow assumption for income taxes also use LIFO in computing income reported in financial statements and forbidding the disclosure of pro forma results from using any other cost flow assumption.

LIFO inventory layer

The LIFO inventory layer is a portion of LIFO inventory cost reported on balance sheet. The ending inventory in physical quantity will usually exceed the beginning inventory. The LIFO cost flow assumption assigns to this increase in physical quantities a cost computed from the prices of the earliest purchases during the year. The LIFO inventory then consists of layers, sometimes called "slices", which typically consist of relatively small amounts of physical quantities from each of the past years when purchases in physical units exceeded sales in units. Each layer carries the prices from near the beginning of the period when the firm acquired it. The earliest layers will typically (in periods of rising prices) have prices much less than current prices. If inventory quantities should decline in a subsequent period - a "dip into old LIFO layers" - the latest layers enter cost of goods sold first.

Line of credit

The line of credit is an agreement with a bank or set of banks for short-term borrowings on demand.

Linear programming

The linear programming is a mathematical tool for finding profit-maximizing (or cost-minimizing) combinations of products to produce when a firm has several products that it can produce but faces linear constraints on the resources available in the production processes or on maximum and minimum production requirements.

Liquid

The liquid is said of a business with a substantial amount (the amount is unspecified) of working capital, especially quick assets.

Liquid assets

The liquid assets refer to cash, current marketable securities, and, sometimes, current receivables.

Liquidity

The liquidity refers to the availability f cash, or near-cash resources, for meeting a firm's obligations.

Loan

The loan is an arrangement in which the owner of property, called the lender, allows someone else, called the borrower, the use of the property for a period of time, which the agreement setting up the loan usually specifies. The borrower promises to return the property to the lender and, often, to make a payment for the use of the property. The term "loan" is generally used when the property is cash and the payment for its use is interest.

LOCOM

LOCOM is the abbreviation for the lower of cost or market.

Long-lived asset

The long-lived asset, also called the long-term asset, is an asset whose benefits the firm expects to receive over several years. It is a noncurrent asset, usually including investments, plant assets, and intangibles.

Long-term

The long-term means a term denoting a time or time periods in the future. How far in the future depends on context. For some securities traders, "long-term" can mean anything beyond the next hour or two. For most managers, it means anything beyond the next year or two. For government policymakers, it can mean anything beyond the next decade or two. For geologists, it can mean millions of years.

Long-term liability

The long-term liability, also called the long-term debt, is the noncurrent liability.

Long-term solvency risk

The long-term solvency risk is the risk that a firm will not have sufficient cash to pay its debts sometime in the long run.

Loophole

The loophole is the imprecise term meaning a technicality allowing a taxpayer (or financial statements) to circumvent the intent, without violating the letter, of the law (or GAAP).

Loss

The loss is the excess of cost over net proceeds for a single transaction, the negative income for a period, or the cost expiration that produce no revenue. See "gain" for a discussion of related and contrasting terms and how to distinguish loss from "expense".

Lower of cost or market

The lower of cost or market, or LOCOM, is a basis for valuation of inventory. This basis sets inventory value at the lower of acquisition cost or current replacement cost (market), subject to several constraints.

MACRS

MACRS is the abbreviation for Modified Accelerated Cost Recovery System.

Maintenance

The maintenance is the expenditures undertaken to preserve the service potential of an asset for its originally intended life. These expenditures are period expenses or product costs. See "repair".

Make-or-buy decision

The make-or-buy decision is a managerial decision about whether the firm should produce a product internally or purchase it from others. Proper make-or-buy decisions in the short run result only when a firm considers incremental costs in the analysis.

Management

The management is an executive authority that operates a business.

Management accounting

See "managerial accounting".

Management audit

The management audit is an audit conducted to ascertain whether a firm or one of its operating units properly carries out its objectives, policies, and procedures. It generally applies only to activities for which accountants can specify qualitative standards. See "audit" and "internal audit".

Management by exception

The management by exception is a principle of management in which managers focus attention on performance only if it differs significantly from that expected.

Management by objective

The management by objective, or MBO, is a management approach designed to focus on the definition and attainment of overall and individual objectives with the participation of all levels of management.

Management information system

The management information system, or MIS, is a system designed to provide all levels of management with timely and reliable information required for planning, control, and evaluation of performance.

Managerial accounting

The managerial accounting, also called the management accounting, is the reporting designed to enhance the ability of management to do its job of decision making, planning, and control. Contrast with "financial accounting".

Manufacturing cost

The manufacturing cost is the cost of producing goods, usually in a factory.

Manufacturing expense

The manufacturing expense is an imprecise, and generally incorrect, alternative title for manufacturing overhead. The term is generally incorrect because these costs are usually product costs, not expenses.

Manufacturing overhead

The manufacturing overhead is the general manufacturing costs that are not directly associated with identifiable units of product and that the firm incurs in providing a capacity to carry on productive activities. Accounting treats fixed manufacturing overhead cost as a product cost under full absorption costing but as an expense of the period under variable costing.

Margin

The margin is the revenue less specified expenses. See "contribution margin" and "gross margin".

Margin of safety

The margin of safety is the excess of actual, or budgeted, sales over break-even sales. It is usually expressed in dollars but may be expressed in units of product.

Marginal cost

The marginal cost is the incremental cost or differential cost of the last unit added to production or the first unit subtracted from production. See "differential" for contrast.

Marginal costing

The marginal costing means the variable costing.

Marginal revenue

The marginal revenue is the increment in revenue from the sale of one additional unit of product.

Marginal tax rate

The marginal tax rate is the amount, expressed as a percentage, by which income taxes increase when taxable income increases by one dollar. Contrast with "average tax rate".

Market-based transfer price

The market-based transfer price is a transfer price based on external market data rather than internal company data.

Market price

See "fair value".

Market rate

The market rate is the rate of interest a company must pay to borrow funds currently. See "effective rate".

Market value

The market value means the fair market value.

Marketable securities

The marketable securities are the stocks and bonds of other companies held that can be readily sold on stock exchanges or over-the-counter markets and that the company plans to sell as cash is needed. They are classified as current assets and as part of "cash" in preparing the statement of cash flows. If the firm holds these same securities for long-term purposes, it will classify them as noncurrent assets. SFAS No. 115 requires that all marketable equity and all debt securities (except those debt securities the holder has the ability and intent to hold to maturity) appear at market value on the balance sheet. The firm reports changes in market value in income for trading securities but debits holding losses or credits holding gains directly to owners' equity accounts for securities available for sale.

Marketing costs

The marketing costs are costs incurred to sell and include locating customers, persuading them to buy, delivering the goods or services, and collecting the sales proceeds.

Master budget

The master budget is a budget projecting all financial statements and their components.

Matching convention

The matching convention is the concept of recognizing cost expirations (expenses) in the same accounting period during which the firm recognizes related revenues. It combines or simultaneously recognizes the revenues and expenses that jointly result from the same transactions or other events.

Material

The material, as an adjective, means relatively important and capable of influencing a decision. See "materiality". As a noun, it means the raw material.

Materiality

The materiality is the concept that accounting should disclose separately only those events that are relatively important (no operable definition yet exists) for the business or for understanding its statements. The FASB says that accounting information is material if "the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement".

Materials efficiency variance

The materials efficiency variance is the difference between actual cost and standard cost of materials, times standard price.

Materials price variance

The materials price variance is the difference between actual cost and standard cost of materials, times actual quantity.

Materials variances

The materials variances are the price and quantity variances for direct materials in standard costing systems and the difference between actual cost and standard cost.

Matrix

The matrix is a rectangular array of numbers or mathematical symbols.

Matrix inverse

The matrix inverse is the matrix whose product with a given square matrix generates the identity matrix. Not all square matrices have inverses. Those that do not are singular. Those that do are nonsingular.

Maturity

The maturity is the date at which an obligation, such as the principal of a bond or a note, becomes due.

MBO

See "management by objective".

Merchandise

The merchandise is the finished goods bought by a retailer or wholesaler for resale. Contrast with "finished goods" of a manufacturing business.

Merchandise costs

The merchandise costs are costs incurred to sell a product, such as commissions and advertising.

Merchandise turnover

The merchandise turnover is the inventory turnover for merchandise. See "ratio".

Merchandising business

The merchandising business, as opposed to a manufacturing or service business, is the one that purchases (rather than manufactures) finished goods for resale.

Merger

The merger is the joining of two or more businesses into a single economic entity.

MIS

See "management information system".

Mix variance

The mix variance is one of the manufacturing variances. Many standard cost systems specify combinations of inputs, for example, labor of a certain skill and materials of a certain quality grade. Sometimes combinations of inputs used differ from those contemplated by the standard. The mix variance attempts to report the cost difference caused by those changes in the combination of inputs.

Mixed cost

The mixed cost is a semifixed or a semivariable cost.

Money

The money is a word seldom used with precision in accounting, at least in part because economists have not yet agreed on its definition. Economists use the term to refer to both a medium of exchange and a store of value. See "cash".

Mortgage

The mortgage is a claim given by the borrower (mortgagor) to the lender (mortgagee) against the property of the borrower in return for a loan.

Moving average

The moving average is an average computed on observations over time. As a new observation becomes available, analysts drop the oldest one so that they always compute the average for the same number of observations and use only the most recent ones.

Moving average method

See "weighted-average inventory method".

Multiple-step

The multiple-step is said of an income statement that shows various subtotals of expenses and losses subtracted from revenues to show intermediate items such as operating income, income of the enterprise (operating income plus interest income), income to investors (income of the enterprise less income taxes), net income to shareholders (income to investors less interest charges), and income retained (net income to shareholders less dividends).

Mutually exclusive projects

The mutually exclusive projects, also called the mutually exclusive investment projects, are the competing investment projects where accepting one project eliminates the possibility of undertaking the remaining projects.

National Association of Accountants

National Association of Accountants, or NAA, is the former name for the Institute of Management Accountants, or IMA.

Natural business year

The natural business year is a 12-month period chosen as the reporting period so that the end of the period coincides with a low point in activity or inventories. See "ratio" for a discussion of analyses of financial statements of companies using a natural business year.

Natural resources

The natural resources are timberland, oil and gas wells, ore deposits, and other products of nature that have economic value. Terminology uses the term depletion to refer to the process of amortizing the cost of natural resources. Natural resources are nonrenewable (for example, oil, coal, gas, ore deposits) or renewable (timberland, sod fields). Terminology often calls the former "wasting assets".

Negotiated transfer price

The negotiated transfer price is a transfer price set jointly by the buying and the selling divisions.

Net

The net means the number reduced by all relevant deductions.

Net assets

The net assets are equal to the total assets minus total liabilities that are the same as the amount of owners' equity.

Net current assets

The net current assets are equal to the working capital, which is calculated as the current assets minus the current liabilities.

Net income

The net income is the excess of all revenues and gains for a period over all expenses and losses of the period. The FASB is proposing to discontinue use of this term and substitute "earnings".

Net loss

The net loss is the excess of all expenses and losses for a period over all revenues and gains of the period. It is a negative net income.

Net present value

The net present value is the discounted or present value of all cash inflows and outflows of a project or of an investment at a given discount rate.

Net realizable value

The net realizable value, also called the net sales value, is a method for allocating joint costs in proportion to realizable values of the joint products. For example, joint products A and B together cost $100; A sells for $60, whereas B sells for $90. Then, a firm would allocate to A $40, or 40% of the $100 joint costs, while it would allocate to B $60, or 60% of the costs.

Net sales

The net sales are the sales at gross invoice amount less returns, allowances, freight paid for customers, and discounts taken.

Net worth

The net worth is a misleading term with the same meaning as owners' equity. One should avoid using this term since accounting valuations at historical cost do not show economic worth.

Network analysis

The network analysis is a method of planning and scheduling a project, usually displayed in a diagram, that enables management to identify the interrelated sequences that it must accomplish to complete the project.

New-product development time

The new-product development time is the period between the first consideration of a product by a firm and its delivery to the customer.

Next-in, first-out

See "NIFO".

NIFO

NIFO, or the next-in, first-out, is a cost flow assumption, which is not allowed by GAAP. In making decisions, many managers consider replacement costs (rather than historical costs) and refer to them as NIFO costs.

No par

The no par is said of stock without a par value.

Nominal accounts

The nominal accounts are the temporary accounts, such as revenue and expense accounts. Contrast with "balance sheet accounts". The firm closes all nominal accounts at the end of each accounting period.

Nominal amount

The nominal amount, also called the nominal value, is an amount stated in dollars, in contrast to an amount stated in constant dollars. Contrast with real amount or real value.

Nominal dollars

The nominal dollars are the measuring unit giving no consideration to differences in the general purchasing power of the dollar over time. The face amount of currency or coin, a bond, an invoice, or a receivable is a nominal dollar amount. When the analyst adjusts that amount for changes in general purchasing power, it becomes a constant dollar amount.

Nominal interest rate

The nominal interest rate is a rate specified on a debt instrument and usually differs from the market or effective rate. It is also a rate of interest quoted for a year. If the interest compounds more often than annually, then the effective interest rate exceeds the nominal rate.

Noncontrollable cost

The noncontrollable cost is a cost that a particular manager cannot control.

Noncurrent

The noncurrent means, of a liability, due in more than one year (or more than one operating cycle). Of an asset, the firm will enjoy the future benefit in more than one year (or more than one operating cycle).

Nonmanufacturing costs

The nonmanufacturing costs are all costs incurred other than those necessary to produce goods. Typically, only manufacturing firms use this designation.

Nonoperating

The nonoperating is, in the income statement context, said of revenues and expenses arising from transactions incidental to the main lines of business of a company. In the statement of cash flows context, it is said of all financing and investing sources or uses of cash in contrast with cash provided by operations. See "operations".

Non-recurring

The non-recurring is said of an event that is not expected to happen often for a given firm. APB Opinion No. 30 requires firms to disclose separately the effects of such events as part of ordinary items unless the event is also unusual. Se "extraordinary item".

Non-value-added activity

The non-value-added activity is an activity that causes costs without increasing value of a product or service to the customer.

Normal costing

The normal costing is a method of charging costs to products using actual direct materials, actual direct labor, and predetermined factory overhead rates.

Normal costing system

The normal costing system is the costing based on actual material and labor costs but using predetermined overhead rates per unit of some activity basis (such as direct labor hours or machine hours) to apply overhead to production. Management decides the rate to charge to production for overhead at the start of the period. At the end of the period, the accounting department multiplies this rate by the actual number of units of the base activity (such as actual direct labor hours worked or actual machine hours used during the period) to apply overhead to production.

Normal spoilage

The normal spoilage is the costs incurred because of ordinary amounts of spoilage. Accounting prorates such costs to units produced as product costs. Contrast with "abnormal spoilage".

Normal standard cost

The normal standard cost, also called the normal standards, is the cost a firm expects to incur under reasonably efficient operating conditions with adequate provision for an average amount of rework, spoilage, and the like.

Normal volume

The normal volume is the level of production over a time span, usually one year, that will satisfy the demands of purchasers and provide for reasonable inventory levels.

Note

The note is an unconditional written promise by the maker (borrower) to pay a certain amount on demand or at a certain future time. See "footnotes" for another context.

Number of days sales in inventory

The number of days sales in inventory is the days of average inventory on hand. See "ratio".

Number of days sales in receivables

The number of days sales in receivables is the days of average collection period for receivables. See "ratio".

Objective function

The objective function is, in linear programming, the name of the profit (or cost) criterion the analyst wants to maximize (or minimize).

Objectivity

The objectivity is the reporting policy implying that the firm will not give formal recognition to an event in financial statements until the firm can measure the magnitude of the events with reasonable accuracy and check that amount with independent verification.

Obsolescence

The obsolescence is a decline in market value of an asset caused by improved alternatives becoming available that will be more cost-effective. The decline in market value does not relate to physical changes in the asset itself. For example, computers become obsolete long before they wear out. See "partial obsolescence".

On-time performance

The on-time performance refers to situations in which the firm delivers the product or service at the time scheduled.

Open account

The open account is any account with a nonzero debit or credit balance.

Operating

The operating is an adjective use to refer to revenue and expense items relating to the main line(s) of business of a company.

Operating accounts

The operating accounts are the revenue, expense, and production cost accounts. Contrast with "balance sheet account".

Operating activities

The operating activities are, for purposes of the statement of cash flows, all transactions and events that are neither financing activities nor investing activities. See "operations".

Operating budget

The operating budget is a formal budget for the operating cycle or for a year.

Operating cash flow

The operating cash flow is the cash flow from operations. Financial statement analysts sometimes use this term to mean cash flow from operations minus capital expenditures minus dividends. This usage leads to such ambiguity that the reader should always confirm the definition the writer uses before drawing inferences from the reported data.

Operating cycle

See "earnings cycle".

Operating expenses

The operating expenses are the expenses incurred in the course of ordinary activities of an entity. The classification frequently includes only selling, general, and administrative expenses, thereby excluding cost of goods sold, interest, and income tax expenses.

Operating lease

The operating lease is a lease accounted for the lessee without showing an asset for the lease rights (leasehold) or a liability for the lease payment obligations. The lessee reports only rental payments during the period, as expenses of the period. The asset remains on the books of a lessor, where rental collections appear as revenues.

Operating leverage

The operating leverage is usually said of a firm with a large proportion of fixed costs in its total costs. Consider a book publisher or a railroad, which is a firm with large costs to produce the first unit of service. Then, the incremental costs of producing another book or transporting another freight car are much less than the average cost, so the gross margin on sale of the subsequent units is relatively large. Contrast, for example, a grocery store, where the contribution margin equals less than five percent of the selling price. For firms with equal profitability, however defined, we say that the one with the larger percentage increase in income from a given percentage increase in dollar sales has the larger operating leverage. See "leverage" for contrast of this term with financial leverage.

Operating ratio

See "ratio".

Operational control

See "control system".

Operational measures of time

The operational measures of time indicate the speed and reliability with which organizations supply products and services to customers.

Operations

The operations are the word not precisely defined in accounting. Generally, analysts distinguish operating activities (producing and selling goods or services) from financing activities (raising funds) and investing activities. Acquiring goods on account and then paying for them one month later, although generally classified as an operating activity, has the characteristics of a financing activity. Or consider the transaction of selling plant assets for a price in excess of book value. On the income statement, the gain appears as part of income from operations (continuing operations or discontinues operations, depending on the circumstances), but the statement of cash flows reports all the funds received below the cashflows from operations section, as a nonoperating source of cash, disposition of noncurrent assets.

Operations costing

The operations costing is a costing system that uses job costing to assign materials costs and process costing to assign conversion costs.

Opinion

The opinion is an attestation or lack thereof contained in the auditor's report.

Opinion paragraph

The opinion paragraph is a section of auditor's report, generally following the scope paragraph, giving the auditor's conclusion that the financial statements are (rarely, are not) in accordance with GAAP and present fairly the financial position, changes in financial position, and the results of operations.

Opportunity cost

The opportunity cost is the present value of the income (or costs) that a firm could earn (or save) from using an asset in its best alternative use to the one under consideration.

Opportunity cost of capital

See "cost of capital".

Option

The option is the legal right to buy something during a specified period at a specified price, called the exercise price.

Ordinary annuity

See "annuity in arrears".

Original cost

The original cost is the acquisition cost. In public utility accounting, it is the acquisition cost of the entity first devoting the asset to public use.

Other operating costs

Other operating costs are all operating costs other than short-run variable costs.

Outlay

The outlay is the amount of an expenditure.

Outlier

The outlier is said of an observation (or data point) that appears to differ significantly in some regard from other observations (or data points) of supposedly the same phenomenon. In a regression analysis, it is often used to describe an observation that falls far from the fitted regression equation (in two dimensions, line).

Out-of-pocket

The out-of-pocket is said of an expenditure usually paid for with cash. It is also an incremental cost.

Out-of-stock cost

The out-of-stock cost is the estimated decrease in future profit as a result of losing customers because a firm has insufficient quantities of inventory currently on hand to meet the demands of customers.

Output

The output is a physical quantity or monetary measurement of goods and services produced.

Outside director

The outside director is a member of a corporate board of directors who is not a company officer and does not participate in the day-to-day management of the corporation.

Outstanding

The outstanding means unpaid or uncollected. When said of stock, it refers to the shares issued less treasury stock. When said of checks, it refers to a check issued that did not clear the bank of a drawer prior to the bank statement date.

Overapplied overhead

The overapplied overhead, also called the overabsorbed overhead, is the costs applied, or charged to product exceeding actual overhead costs during the period. It is also a credit balance in an overhead account after overhead is assigned to product.

Overhead costs

The overhead costs are any cost not directly associated with the production or sale of identifiable goods and services. They are sometimes called burden or indirect costs and, in Britain, oncosts. They are frequently limited to manufacturing overhead. See "central corporate expenses" and "manufacturing overhead".

Overhead rate

The overhead rate is a standard, or other predetermined, rate, at which a firm applies overhead costs to products or to services.

Owners' equity

The owners' equity is the assets minus liabilities and contains the paid-in capital and retained earnings of a corporation.

P&L

P&L means the profit-and-loss statement, or the income statement.

Paper profit

The paper profit is a gain not yet realized through a transaction. It is an unrealized holding gain.

Par value

The par value means the face amount of a security.

Pareto chart

In many business settings, a relatively small percentage of the potential population causes a relatively large percentage of the activity at interest. For example, some businesses find that the top 20 percent of the customers buy 80 percent of the goods sold. Or, the top 10 percent of products account for 60 percent of the revenues or 70 percent of the profits. The statistical distribution known as the Pareto distribution has this property of skewness, so a graph of a phenomenon with such skewness has come to be known as a Pareto chart, even if the underlying data do not actually well fit the Pareto distribution. Practitioners of TQM find that in many businesses a small number of processes account for a large fraction of the quality problems, so they advocate charting potential problems and actual occurrences of problems to identify the relatively small number of sources of trouble. They call such a chart a Pareto chart.

Partial obsolescence

The partial obsolescence is one cause of decline in market value of an asset. As technology improves, the economic value of existing assets declines. In many cases, however, it will not pay a firm to replace the existing asset with a new one, even though it would acquire the new type rather than the old if it did make a new acquisition currently. In these cases, the accountant should theoretically recognize a loss from partial obsolescence from an old, out-of-date, asset owned by a firm, but GAAP does not permit recognition of partial obsolescence until the sum of future cash flows from the asset totals less than book value. See "impairment". The firm will carry the old asset at cost less accumulated depreciation until the firm retires it from service so long as the undiscounted future cash flows from the asset exceed its book value. Thus, management that uses an asset subject to partial obsolescence reports results inferior to those reported by similar management that uses a new asset. See "obsolescence".

Partnership

The partnership is the contractual arrangement between individuals to share resources and operations in a jointly run business.

Patent

The patent is a right granted for up to 20 years by the federal government to exclude others from manufacturing, using, or selling a claimed design, product, or plant (e.g., a new breed of rose) or from using a claimed process or method of manufacture. It becomes an asset if the firm acquires it by purchase. If the firm develops it internally, current GAAP require the firm to expense the development costs when incurred.

Pay-as-you-go

The pay-as-you-go is said of an income tax scheme in which the taxpayer makes periodic payments of income taxes during the period when he or she earns the income to be taxed. Contrast to a scheme in which the taxpayer owes no payments until the end of, or after, the period when it earned the income being taxed (called PAYE - pay-as-you-earn - in Britain). The phrase is sometimes used to describe an unfunded pension plan, or retirement benefit plan, in which the firm makes payments to pension plan beneficiaries from general corporate funds, not from cash previously contributed to a fund. Under this method, the firm debits expense as it makes payments, not as it incurs the obligations.

Payable

The payable means unpaid but not necessarily due or past due.

Payback period

The payback period is the amount of time that must elapse before the cash inflows from a project equal the cash outflows.

Payback reciprocal

The payback reciprocal is one divided by the payback period. This number approximates the internal rate of return on a project when the project life exceeds twice the payback period and cash inflows are identical in every period after the initial period.

P/E ratio

See "price-earnings ratio".

Percentage statement

The percentage statement is a statement containing, in addition to (or instead of) dollar amounts, ratios of dollar amounts to some base. In a percentage income statement, the base is usually either net sales or total revenues, and in a percentage balance sheet, the base is usually total assets.

Period

See "accounting period".

Period cost

The period cost is an inferior term for period expense.

Period expense

The period expense, also called the period charge, is an expenditure, usually based on the passage of time, charged to operations of the accounting period rather than capitalized as an asset. Contrast with "product cost".

Periodic cash flows

The periodic cash flows are the cash flows occurring during the life of the project.

Periodic inventory

The periodic inventory is, in recording inventory, a method that uses data on beginning inventory, additions to inventories, and ending inventory to find the cost of withdrawals from inventory. Contrast with "perpetual inventory".

Periodic procedures

The periodic procedures are the process of making adjusting entries and closing entries and preparing the financial statements, usually by use of trial balances and work sheets.

Permanent account

The permanent account is an account that appears on the balance sheet. Contrast with "temporary account".

Perpetual annuity

See "perpetuity".

Perpetual inventory

The perpetual inventory is the records on quantities and amounts of inventory that the firm changes and makes current with each physical addition to or withdrawal from the stock of goods. It also refers to an inventory so recorded. The record will show the physical quantities and, frequently, the dollar valuations that should be on hand at any time. Because the firm explicitly computes cost of goods sold, it can use the inventory equation to compute an amount for what ending inventory should be. It can then compare the computed amount of ending inventory to the actual amount of ending inventory as a control device to measure the amount of shrinkages. Contrast with "periodic inventory".

Perpetuity

The perpetuity is an annuity whose payments continue forever. The present value of a perpetuity in arrears is computed as the periodic payment divided by the interest rate per period.

PERT

The PERT, or the Program Evaluation and Review Technique, is a method of network analysis in which the analyst makes three time estimates for each activity - the optimistic time, the most likely time, and the pessimistic time - and gives an expected completion date for the project within a probability range.

Physical units method

The physical units method is a method of allocating a joint cost to the joint products based on a physical measure of the joint products, e.g., allocating the cost of a cow to sirloin steak and to hamburger, based on the weight of the meat. This method usually provides nonsensical (see "sterilized allocation") results unless the physical units of the joint products tend to have the same value.

Physical verification

The physical verification is the verification, by an auditor, performed by actually inspecting items in inventory, plant assets, and the like, in contrast to merely checking the written records. The auditor may use statistical sampling procedures.

Planning and control process

The planning and control process is the general name for the techniques of management comprising the setting of organizational goals and strategic plans, capital budgeting, operations budgeting, comparison of plans with actual results, performance evaluation and corrective action, and revisions of goals, plans, and budgets.

Plant

See "plant assets".

Plant asset turnover

The plant asset turnover is the number of dollars of sales generated per dollar of plant assets and is equal to sales divided by the average plant assets.

Plant assets

The plant assets are assets used in the revenue-production process. They include buildings, machinery, equipment, land, and natural resources. The phrase "property, plant, and equipment" (although often appearing on balance sheets) is therefore a redundancy. In this context, "plant" used alone means buildings.

Plantwide allocation method

The plantwide allocation method is a method for allocating overhead costs to product. First, use one cost pool for the entire plant. Then, allocate all costs from that pool to product using a single overhead allocation rate, or one set of rates, to all the products of the plant, independent of the number of departments in the plant.

Plug

The plug is the process for finding an unknown amount. For any account, the following formula holds: the beginning balance plus the addition equal to the deductions plus the ending balance. If one knows any three of the four items, one can find the fourth with simple arithmetic, called "plugging". In making a journal entry, one often knows all debits and all but one of the credits (or vice versa). Because the double-entry bookkeeping requires equal debits and credits, one can compute the unknown quantity by subtracting the sum of the known credits from the sum of all the debits (or vice versa), also called "plugging". Accountants often call the unknown the "plug".

Population

The population is the entire set of numbers or items from which the analyst samples or performs some other analysis.

Post

Posting means recording entries in an account to a ledger, usually as transfers from a journal.

Post-closing trial balance

The post-closing trial balance is the trial balance taken after the accountant has closed all temporary accounts.

PPB

The PPB means the program budgeting. The second "P" stands for "plan".

Practical capacity

The practical capacity is the maximum level at which the plant or department can operate efficiently.

Precision

The precision means the degree of accuracy for an estimate derived from a sampling process, usually expressed as a range of values around the estimate. The analyst might express a sample estimate in the following terms: "Based on the sample, we are 95 percent sure (confidence level) that the true population value is within the range of X to Y (precision)". See "confidence level".

Preclosing trial balance

The preclosing trial balance is the trial balance taken at the end of the period before closing entries. In this sense, it means an adjusted trial balance. If taken before adjusting entries, then it is the synonymous with an unadjusted trial balance.

Predatory pricing

The predatory pricing means setting prices below some measure of cost in an effort to drive out competitors with hope of recouping losses later by charging monopoly prices. It is illegal in the US if the prices set are below long-run variable costs.

Predetermined overhead rate

The predetermined overhead rate is the rate used in applying overhead to products or departments developed at the start of a period. It computes the rate as estimated overhead cost divided by the estimated number of units of the overhead allocation base (or denominator volume) activity. See "normal costing".

Preferred shares

The preferred shares are the capital stock with a claim to income or assets after bondholders but before common shares. Dividends on preferred shares are income distributions, not expenses.

Prepaid expense

The prepaid expense is an expenditure that leads to a deferred charge or prepayment. Strictly speaking, this is a contradiction in terms because an expense is a gone asset, and this title refers to past expenditures, such as for rent or insurance premiums, that still have future benefits and thus are assets. In this sense, this term should be avoided and used as prepayment instead.

Present value

The present value is the value today (or at some specific date) of an amount or amounts to be paid or received later (or at other, different dates), discounted at some interest or discount rate. It is an amount that, if invested today at the specified ate, will grow to the amount to be paid or received in the future.

Prevention costs

The prevention costs are costs incurred to prevent defects in the products or services from being produced.

Price

The price is the quantity of one good or service, usually cash, asked in return for a unit of another good or service. See "fair value".

Price-earning ratio

The price-earning ratio, or P/E ratio, is the ratio at a given time calculated as the market value of the common share of a company divided by the earnings for the past year. The analyst usually bases the denominator on income from continuing operations or, if the analyst thinks the current figure for that amount does not represent a usual situation - such as when the number is negative or, if positive, close to zero - on some estimate of the number. See "ratio".

Price index

The price index is a series of numbers, one for each period, that purports to represent some average of prices for a series of periods, relative to a base period.

Price level

The price level is the number from a price index series for a given period or date.

Price variance

The price variance is, in accounting for standard costs, an amount equal to the actual quantity multiplied by the difference between the actual cost per unit and the standard cost per unit. It is also called the spending variance.

Primary earnings per share

The primary earnings per share, or PEPS, is the net income to common shareholders plus interest (net of tax) or dividends paid on common-stock equivalents divided by the summation of the weighted average of common shares outstanding and the net increase in the number of common shares that would become outstanding if the holders of all common stock equivalents were to exchange them for common shares with cash proceeds, if any, used to retire common shares. The FASB proposes to change the computation and to use the new title, basic earnings per share.

Prime cost

The prime cost is the sum of direct materials plus direct labor costs assigned to product.

Prime rate

The prime rate is the loan rate charged by commercial banks to their creditworthy customers. Some customers pay even less than the prime rate and others, more. The Federal Reserve Bulletin is the authoritative source of information about historical prime rates.

Principal

The principal is an amount in which interest accrues, either as expense for the borrower or as revenue for the lender. It is the face amount of a loan. It also refers to the absent owner who hires the manager as an agent in a principal-agent relationship.

Principle

See "generally accepted accounting principles".

Pro forma statements

The pro forma statements are the hypothetical financial statements as they would appear if some event, such as a merger or increased production and sales, had occurred or were to occur. They are sometimes spelled as one word, proforma.

Proceeds

The proceeds are the funds received from the disposition of assets or from the issue of securities.

Process costing

The process costing is a method of cost accounting based on average costs, which are equal to the total cost divided by the equivalent units of work done in a period. It is typically used for assembly lines or for products that the firm produces in a series of steps that are more continuous than discrete.

Product

The product means goods or services produced.

Product cost

The product cost is any manufacturing cost that the firm can - or, in some contexts, should - debit to an inventory account. See "flow of costs", for example. Contrast with "period expenses".

Product-level activities

The product-level activities are activities that support a particular product or service line.

Product life cycle

The product life cycle is the time span between initial concept (typically starting with research and development) of a good or service and time when firm ceases to support customers who have purchased the good or service.

Production cost

The production cost is the manufacturing cost.

Production cost account

The production cost account is a temporary account for accumulating manufacturing costs during a period.

Production cycle efficiency

The production cycle efficiency is a measure of the efficiency of the total manufacturing cycle. It equals processing time divided by the manufacturing cycle time.

Production cycle time

The production cycle time is the time involved in processing, moving, storing, and inspecting products and materials.

Production department

The production department is a department producing salable goods or services. Contrast with "service department".

Production volume variance

The production volume variance is the standard fixed overhead rate per unit of normal capacity (or base activity) times the difference between the units of base activity budgeted or planned for a period minus actual units of base activity worked or assigned to product during the period. It is often called a "volume variance".

Productive capacity

The productive capacity is one attribute measured for assets. The current cost of long-term assets means the cost of reproducing the productive capacity (for example, the ability to manufacture one million units per year), not the cost of reproducing the actual physical assets currently used. See "reproduction cost". Replacement cost of productive capacity will be the same as reproduction cost of assets only in the unusual case when no technological improvement in production processes has occurred and the relative prices of goods and services used in production have remained approximately the same as when the firm acquired the currently used ones.

Profits

The profits are the excess of revenues over expenses for a transaction and are sometimes used synonymously with net income for the period.

Profit center

The profit center is a responsibility center for which a firm accumulates both revenues and expenses. Contrast with "cost center".

Profit margin

The profit margin means the sales minus all expenses.

Profit margin percentage

The profit margin percentage equals to the profit margin divided by net sales.

Profit maximization

The profit maximization is the doctrine that the firm should account for a given set of operations so as to make reported net income as large as possible. Contrast with "conservatism". This concept in accounting differs from the profit-maximizing concept in economics, which states that the firm should manage operations to maximize the present value of he wealth of the firm, generally by equating marginal costs and marginal revenues.

Profit variance analysis

The profit variance analysis is the analysis of the causes of the difference between the budgeted profit in the master budget and the profits earned.

Profit-volume analysis

The profit-volume analysis is the analysis of effects on profits caused by changes in volume or contribution margin per unit or fixed costs. See "break-even chart".

Profit-volume graph

See "break-even chart".

Profit-volume ratio

The profit-volume ratio is the net income divided by net sales in dollars.

Profitability accounting

See "responsibility accounting".

Program budgeting

The program budgeting, also called PPB, is the specification and analysis of inputs, outputs, costs, and alternatives that link plans to budgets.

Programmed cost

The programmed cost is a fixed cost not essential for carrying out operations. For example, a firm can control costs for research and development and advertising designed to generate new business, but once it commits to incur them, they become fixed costs. These costs are sometimes called managed cost or discretionary costs. Contrast with "capacity cost".

Projected financial statement

See "Pro forma statement".

Property, plant, and equipment

See "plant assets".

Prorate

Prorating means allocating in proportion to some base, e.g., allocating service department costs in proportion to hours of service used by the benefited department or allocating manufacturing variances to product sold and to product added to ending inventory.

Prorating variance

See "prorate".

Provision

The provision is a part of an account title. Often, the firm must recognize an expense even though it cannot be sure of the exact amount. The entry for the estimated expense, such as for income taxes or expected costs under warranty, is the debit of the estimated expense and the credit of estimated liability. American terminology often uses the word in the expense account title of the above entry. Thus, the title of Provision for Income Taxes means the estimate of income tax expense. British terminology uses the word "provision" in the title for the estimated liability of the above entry, so that Provision for Income Taxes is a balance sheet account.

Public accountant

Generally, the term, public accountant, is synonymous with "certified public accountant". Some jurisdictions, however, license individuals who are not CPA's as public accountants.

Public accounting

The public accounting is a portion of accounting primarily involving the attest function, culminating in the auditor's report.

Purchase investigation

The purchase investigation is an investigation of the financial affairs of a company for the purpose of disclosing matters that may influence the terms or conclusion of a potential acquisition.

Purchase order

The purchase order is the document issued by a buyer authorizing a seller to deliver goods, with the buyer to make payment later.

Qualified report

The qualified report is the auditor's report containing a statement that the auditor was unable to complete a satisfactory examination of all things considered relevant or that the auditor has doubts about the financial impact of some material item reported in the financial statements. See "except for" and "subject to".

Quality

In modern usage, a product or service has quality to the extent it conforms to specifications or provides customers the characteristics promised them.

Quantitative performance measure

The quantitative performance measure is a measure of output based on an objectively observable quantity, such as units produced or direct costs incurred, rather than on an unobservable quantity or a quantity observable only non-objectively, like quality of service provided.

Quantity discount

The quantity discount is a reduction in purchase price as quantity purchased increases. The Robinson-Patman Act constrains the amount of the discount. It should not be confused with purchase discount.

Quantity variance

The quantity variance means efficiency variance, and is, in standard cost systems, the standard price per unit times the difference between the actual quantity used and the standard quantity that should be used.

Quick assets

The quick assets are assets readily convertible into cash. Those assets include cash, current marketable securities, and current receivables.

Quick ratio

The quick ratio is equal to the sum of cash, current marketable securities, and current receivables divided by current liabilities. It is often called the acid test ratio. The analyst may exclude some non-liquid receivables from the numerator. See "ratio".

R-square

The R-square is the proportion of the statistical variance of a dependent variable explained by the equation fit to the independent variable(s) in a regression analysis.

Railroad Accounting Principles Board

The Railroad Accounting Principles Board, or RAPB, is a board brought into existence by the Staggers Rail Act of 1980 to advise the Interstate Commerce Commission on accounting matters affecting railroads. The RAPB was the only cost-accounting body authorized by the government during the decade of the 1980's (because Congress ceased funding the CASB during the 1980's). The RAPB incorporated the pronouncements of the CASB and became the governmental authority on cost accounting principles.

R&D

See "research and development".

Random number sampling

The random number sampling is a method for choosing a sample in which the analyst selects items from the population by using a random number table or generator.

Random sampling

The random sampling is a method for choosing a sample in which all items in the population have an equal chance of being selected. Compare "judgment(al) sampling".

RAPB

See "Railroad Accounting Principles Board".

Rate of return

See "ratio" and "return on assets".

Rate of return on assets

See "return on assets".

Rate of return on common stock equity

See "ratio".

Rate of return on owners' equity

See "ratio".

Rate of return on shareholders' equity

See "ratio".

Rate variance

The rate variance is the price variance, usually for direct labor costs.

Ratio

The ratio is the number resulting when one number divides another. Analysts generally use ratios to assess aspects of profitability, solvency, and liquidity. The commonly used financial ratios fall into three categories: (1) those that summarize some aspect of operations for a period, usually a year, (2) those that summarize some aspect of financial position at a given moment - the moment for which a balance sheet reports, and (3) those that relate some aspect of operations to some aspect of financial position.

Raw material

The raw material means goods purchased for use in manufacturing a product.

Real accounts

The real accounts mean the balance sheet accounts, as opposed to nominal accounts. See "permanent accounts".

Real interest rate

The real interest rate is the interest rate reflecting the productivity of capital, not including a premium for inflation anticipated over the life of the loan.

Realizable value

The realizable value means the fair value or, sometimes, net realizable (sales) value.

Realize

The word "realize" means to convert into funds. When applied to a gain or loss, it implies that an arm's-length transaction has taken place. Contrast with "recognize". The firm may recognize a loss in the financial statements even though it has not yet realized the loss via a transaction.

Realized holding gain

See "inventory profit".

Receipt

The receipt means an acquisition of cash.

Receivable

The receivable is any collectible, whether or not it is currently due.

Receivable turnover

See "ratio".

Recognize

The word "recognize" means to enter a transaction in the accounts. It is not synonymous with "realize".

Reconciliation

The reconciliation is a calculation that allows how one balance or figure derives from another, such as a reconciliation of retained earnings or a bank reconciliation schedule. See "articulate".

Refinancing

The refinancing is an adjustment in the capital structure of a corporation, involving changes in the nature and amounts of the various classes of debt and, in some cases, capital as well as other components of shareholders' equity. The asset carrying values in the accounts remain unchanged.

Regression analysis

The regression analysis is a method of cost estimation based on statistical techniques for fitting a line (or its equivalent in higher mathematical dimensions) to an observed series of data points, usually by minimizing the sum of squared deviations of the observed data from the fitted line. Common usage calls the cost that the analysis explains the "dependent variable". It calls the variable(s) we use to estimate cost behavior the "independent variable(s)". If we use more than one independent variable, the term for the analysis is "multiple regression analysis". See "R-square", "standard error", and "t-value".

Reinvestment rate

The reinvestment rate is, in a capital budgeting context, the rate at which the firm invests cash inflows from a project occurring before the completion of the project. Once the analyst assumes such a rate, no project can ever have multiple internal rates of return. See "Descartes' rule of signs".

Relative performance evaluation

The relative performance evaluation is by setting performance targets and, sometimes, compensation in relation to the performance of others, perhaps in different firms or divisions, that face a similar environment.

Relevant cost

The relevant cost is the cost used by analyst in making a decision. It is an incremental cost and thus an opportunity cost.

Relevant range

The relevant range is the activity levels over which costs are linear or for which flexible budget estimates and break-even charts will remain valid.

Rent

The rent is a charge for use of land, buildings, or other assets.

Repair

The repair is an expenditure to restore the service potential of an asset after damage or after prolonged use. In the second sense, after prolonged use, the difference between repair and maintenance is one of degree and not of kind. A repair is treated as an expense of the period when incurred. Because the firm treats repairs and maintenance similarly in this regard, the distinction is not important. A repair helps to maintain capacity at the levels planned when the firm acquired the asset.

Replacement cost

The replacement cost is, for an asset, the current fair market price to purchase another, similar asset with the same future benefit or service potential. It is a current cost. See "reproduction cost" and "productive capacity". See also "inventory profit".

Reporting objectives

The reporting objectives, also called the reporting policies, are the general purposes for which the firm prepares financial statements. The FASB has discussed these in SFAC No.1.

Representative item sampling

The representative item sampling is the sampling in which the analyst believes the sample selected is typical of the entire population from which it comes. Compare "specific item sampling".

Reproduction cost

The reproduction cost is the cost necessary to acquire an asset similar in all physical respects to another asset for which the analyst requires a current value. See "replacement cost" and "productive capacity" for contrast.

Required rate of return

The required rate of return is also notated as RRR. See "cost of capital".

Research and development

The research and development is a form of economic activity with special accounting rules. Firms engage in research in hopes of discovering new knowledge that will create a new product, process, or service or improving a present product, process, or service. Development translates research findings or other knowledge into a new or improved product, process, or service. SFAS No.2 requires that firms expense costs of such activities as incurred on the grounds that the future benefits are too uncertain to warrant capitalization as an asset. This treatment seems questionable to us because we wonder why firms would continue to undertake R&D if there was no expectation of future benefit. If future benefits exist, then R&D costs should be assets that appear, like other assets, at historical cost.

Residual income

The residual income is, in an external reporting context, a term that refers to net income to common shares, or the net income less preferred stock dividends. In managerial accounting, this term refers to the excess of income for a division or segment of a company over the product of the cost of capital for the company multiplied by the average amount of capital invested in the division during the period over which the division earned the income.

Residual value

The residual value is, at any time, the estimated or actual net realizable value (i.e., proceeds less removal costs) of an asset, usually a depreciable plant asset. In the context of depreciation accounting, this term is equivalent to salvage value and is preferred to scrap value because the firm need not scrap the asset. It is sometimes used to mean net book value. In the context of a noncancelable lease, it is the estimated value of the leased asset at the end of the lease period. See "lease".

Resources supplied

The resources supplied means the expenditures made for an activity.

Resources used

The resources used equal to the cost driver rate times the cost driver volume.

Responsibility accounting

The responsibility accounting is an accounting for a business by considering various units as separate entities, or profit centers, giving management of each unit responsibility for the revenues and expenses generated by the unit. See "transfer price".

Responsibility center

The responsibility center is an organization part or segment that top management holds accountable for a specified set of activities. It is also called the "accountability center". See "cost center", "investment center", "profit center", and "revenue center".

Retained earnings

The retained earnings are the net income over the life of a corporation less all dividends including capitalization through stock dividends. They are also equal to the owners' equity less contributed capital.

Retained earnings statement

The retained earnings statement is a reconciliation of the beginning and the ending balances in the retained earnings account. It is required by generally accepted accounting principles whenever the firm presents comparative balance sheets and an income statement. This reconciliation can appear in a separate statement, in a combined statement of income and retained earnings, or in the balance sheet.

Return

The return is a schedule of information required by governmental bodies, such as the tax return required by the Internal Revenue Service. It also refers to the physical return of merchandise. See "return on investment" as well.

Return on assets

The return on assets, or ROA, is the summation of the net income, after-tax interest charges, and minority interest in income divided by the average total assets. Most financial economists would subtract average non-interest-bearing liabilities from the denominator. Economists realize that when liabilities do not provide for explicit interest charges, the creditor adjusts the terms of contract, such as setting a higher selling price or lower discount, to those who do not pay cash immediately. This ratio requires in the numerator the income amount before the firm accrues any charges to suppliers of funds. We cannot measure the interest charges implicit in the non-interest-bearing liabilities because they cause items such as cost of goods sold and salary expense to be somewhat larger, since the interest is implicit. Subtracting their amounts from the denominator adjusts for their implicit cost. Such subtraction assumes that assets financed with non-interest-bearing liabilities have the same rate of return as all the other assets.

Return on investment

The return on investment, or ROI, is the income before distributions to suppliers of capital for a period. As a rate, it means such income divided by the average total assets. It is also called the return on capital. The analyst should add back interest, net of tax effects, to net income for the numerator. See "ratio".

Revenue

The revenue is the increase in owners' equity accompanying the increase in net assets caused by selling goods or rendering services. It includes sales of products, merchandise, and services, and earnings from interest, dividends, rents, and the like. The revenue should be measured as the expected net present value of the net assets the firm will receive and should not be confused with the receipt of funds, which may occur before, when or after revenue is recognized. Contrast with "gain" and "income". See also "holding gain". It should be avoided to use the term "gross income" synonymously with revenue.

Revenue center

The revenue center is, within a firm, a responsibility center that has control only over revenues generated. Contrast with "cost center". See "profit center".

Risk

The risk is a measure of the variability of the return on investment. For a given expected amount of return, most people prefer less risk to more risk. Therefore, in rational markets, investments with more risk usually promise, or investors expect to receive, a higher rate of return than investments with lower risk. Most people use "risk" and "uncertainty" as synonyms. In technical language, however, these terms have different meanings. The word "risk" should be used when we know the probabilities attached to the various outcomes, such as the probabilities of heads or tails in the flip of a fair coin. "Uncertainty" refers to an event for which we can only estimate the probabilities of the outcomes, such as winning or losing a lawsuit.

Risk-adjusted discount rate

The risk-adjusted discount rate is the rate used in discounting cash flows for projects more or less risky than the average of a firm. In a capital budgeting context, a decision analyst compares projects by comparing their net present values for a given interest rate, usually the cost of capital. If the analyst considers the outcome of a given project to be much more or much less risky than the normal undertakings of the company, then the analyst will use a larger or smaller interest rate in discounting, and the rate used is "risk-adjusted".

Risk-free rate

The risk-free rate is an interest rate reflecting only the pure interest rate plus an amount to compensate for inflation anticipated over the life of a loan, excluding a premium for the risk of default by the borrower. Financial economists usually measure the risk free rate in the US from US government securities, such as Treasury bills and notes.

Risk premium

The risk premium is an extra compensation paid to employees or extra interest paid to lenders, over amounts usually considered normal, in return for their undertaking to engage in activities riskier than normal.

ROA

See "return on assets".

ROI

ROI is usually used to refer to a single project and expressed as a ratio of the income over average cost of assets devoted to the project. See "return on investment".

Royalty

The royalty is a compensation for the use of property, usually a patent, copyrighted material, or natural resources. The amount is often expressed as a percentage of receipts from using the property or as an amount per unit produced.

RRR

RRR is the abbreviation for the required rate of return. See "cost of capital".

Rule of 69

The rule of 69 states that an amount of cash invested at r percent per period will double in 69 / r + 0.35 periods. This approximation is accurate to one-tenth of a period for interest rates between 0.25 and 100 percent per period.

Rule of 72

The rule of 72 states that an amount of cash invested at r percent per period will double in 72 / r periods. It is a reasonable approximation for interest rates between 4 and 10 percent but not nearly as accurate as the rule of 69 for interest rates outside that range.

Safety stock

The safety stock is the extra items of inventory kept on hand to protect against running out.

Salary

The salary is the compensation earned by managers, administrators, and professional, not based on an hourly rate. Contrast with "wage".

Sale

The sale is a revenue transaction in which the firm delivers goods or services to a customer in return for cash or a contractual obligation to pay.

Sale and leaseback

The sale and leaseback is a financing transaction in which the firm sells improved property but takes it back for use on a long-term lease. Such transactions often have advantageous income tax effects but usually have no effect on financial statement income.

Sales activity variance

See "sales volume variance".

Sales discount

The sales discount is a sales invoice price reduction usually offered for prompt payment.

Sales return

The sales return is the physical return of merchandise. The seller often accumulates amounts of such returns in a temporary revenue contra-account.

Sales-type lease

See "capital lease". When a manufacturer that ordinarily sells goods enters a capital lease as lessor, the lease is a sales-type lease. When a financial firm, such as a bank or insurance company or leasing company, acquires the asset from the manufacturer and then enters a capital lease as lessor, the lease is a direct-financing-type lease. The manufacturer recognizes its ordinary profit (sales price less cost of goods sold, where sales price is the present value of the contractual lease payments plus any down payment) on executing the sales-type lease, but the financial firm does not recognize profit on executing a capital lease of the direct-financing type.

Sales volume variance

The sales volume variance is the budgeted contribution margin per unit times the difference of the planned sales volume and the actual sales volume.

Salvage value

The salvage value is the actual or estimated selling price, net of removal or disposal costs, of a used plant asset that the firm expects to sell or otherwise retire.

Scale effect

See "discounted cash flow".

Scatter diagram

The scatter diagram is a graphic representation of the relation between two or more variables within a population.

Schedule

The schedule is a supporting set of calculations, with explanations, that show how to derive figures in a financial statement or tax return.

SEC

The SEC, or the Securities and Exchange Commission, is an agency authorized by the US Congress to regulate, among other things, the financial reporting practices of most public corporations. It has indicated that it will usually allow the FASB to set accounting principles, but it often requires more disclosure than the FASB requires. The SEC states its accounting requirements in its Accounting Series Release (ASR), Financial Reporting Releases, Accounting and Auditing Enforcement Releases, Staff Accounting Bulletins (these are, strictly speaking, interpretations by the accounting staff, not rules of the commissioners themselves), and Regulations S-X.

Security

The security is a document that indicates ownership, such as a share of stock, or indebtedness, such as a bond, or potential ownership, such as an option or warrant.

Self-check digit

The self-check digit, also called the self-checking digit, is a digit forming part of an account or code number, normally the last digit of the number, which is mathematically derived from the other numbers of the code and is used to detect errors i transcribing the code number. For example, assume the last digit of the account number is the remainder after summing the preceding digits and dividing that sum by nine. Suppose the computer encounters the account numbers 7027261-7 and 9445229-7. The program can tell that something has gone wrong with the encoding of the second account number because the sum of the first seven digits is 35, whose remainder on division by 9 is 8, not 7. The first account number does not show such an error because the sum of the first seven digits is 25, whose remainder on division by 9 is, indeed, 7. The first account number may be in error, but the second surely is.

Selling and administrative expenses

The selling and administrative expenses are expenses not specifically identifiable with, or assigned to, production.

Semifixed costs

The semifixed costs are costs that increase with activity as a step function.

Semivariable costs

The semivariable costs are costs that increase strictly linearly with activity but that are positive at zero activity level. Royalty fees of 2 percent of sales are variable, but royalty fees of $1,000 per year plus 2 percent of sales are semivariable.

Sensitivity analysis

The sensitivity analysis is a study of how the outcome of a decision-making process changes as one or more of the assumptions change.

Sequential access

The sequential access is the access to computer storage where the analyst can locate information only by a sequential search of the storage file. Compare "direct access".

Service

The service is the benefits from a product - both tangible and intangible.

Service bureau

The service bureau is a commercial data-processing center providing service to various customers.

Service department

The service department is a department, such as the personnel or computer department, that provides services to other departments rather than the direct work on a salable product. Contrast with "production department". A firm must allocate costs of service departments whose services benefit manufacturing operations to product costs under full absorption costing.

Service life

The service life is a period of expected usefulness of an asset. It may differ from depreciable life for income tax purposes.

Service potential

The service potential is the future benefits that cause an item to be classified as an asset. Without service potential, an item has no future benefits, and accounting will not classify the item as an asset. The FASB suggests that the primary characteristic of service potential is the ability to generate future net cash inflows.

Services

The services are the useful work done by a person, a machine, or an organization. See "goods".

Setup

The setup is the time or costs required to prepare production equipment for doing a job.

SFAC

SFAC is the abbreviation for the Statement of Financial Accounting Concepts of the FASB.

SFAS

SFAS is the abbreviation for the Statement of Financial Accounting Standards. See "FASB"

Shadow price

The shadow price is an opportunity cost. A linear programming analysis provides as one of its outputs the potential value of having available more of the scarce resources that constrain the production process - for example, the value of having more time available on a machine tool critical to the production of two products. Common terminology refers to this value as the "shadow price" or the "dual value" of the scarce resource.

Share

The share is a unit of stock representing ownership in a corporation.

Shareholders' equity

The shareholders' equity is the proprietorship or owners' equity of a corporation. Because stock means inventory in Australia, Britain, and Canada, the term "shareholders' equity", rather than "stockholders' equity" is being used there.

Short-term

The short-term means current, ordinarily due within one year.

Short-term liquidity risk

The short-term liquidity risk is the risk that an entity will not have enough cash in the short run to pay its debt.

Short-term operating budget

The short-term operating budget is the budget that states the plan of action by management for the coming year in quantitative terms.

Shrinkage

The shrinkage is an excess of inventory shown on the books over actual physical quantities on hand and can result from theft or shoplifting as well as from evaporation or general wear and tear. Some accountants, in an attempt to downplay their own errors, use this term to mean record keeping mistakes that they later must correct and that result in material changes in reported income. The term "shrinkage" should not be used for the correction of mistakes because adequate terminology exists for describing mistakes.

Shutdown cost

The shutdown cost is the fixed cost that the firm continues to incur after it has ceased production. It is also the cost of closing down a particular production facility.

Simple interest

The simple interest is the interest calculated on principal where interest earned during periods before maturity of the loan does not increase the principal amount earning interest for the subsequent periods and the lender cannot withdraw the funds before maturity. Interest is calculated as the principal times interest rate times time, which the rate is a rate per period (typically a year) and time is expressed in units of that period. Simple interest is seldom used in economic calculations except for periods of less than one year and then only for computational convenience. Contrast with "compound interest".

Skeleton account

See "T-account".

Slide

The slide is the name of the error made by a bookkeeper in recording the digits of a number correctly with the decimal point misplaced, e.g., recording $123.40 as $1,234.00 or as $12.34. If the only errors in a trial balance result from one or more slides, then the difference between the sum of the debits and the sum of the credits will be divisible by nine. Not all such differences divisible by nine result from slides. See "transposition error".

SMAC

The SMAC, or the Society of Management Accountants of Canada, is the national association of accountants whose provincial associations engage in industrial and governmental accounting. The association undertakes research and administers an educational program and comprehensive examinations, which those who pass qualify to be designated CMA, or Certified Management Accountants, formally called RIA, or Registered Industrial Accountant.

Software

The software is the programming aids, such as compilers, sort and report programs, and generators, that extend the capabilities of and simplify the use of the computer, as well as certain operating systems and other control programs. Compare with "hardware".

Solvent

Being solvent means being able to meet debts when due.

Source of funds

The source of funds is any transaction that increases cash and marketable securities held as current assets.

Sources and uses statement

See "statement of cash flow".

Specific identification method

The specific identification method is the method for valuing ending inventory and cost of goods sold by identifying actual units sold and remaining in inventory and summing the actual costs of those individual units. It is usually used for items with large unit values, such as precious jewelry, automobiles, and fur coats.

Specific item sampling

The specific item sampling is the sampling in which the analyst selects particular items because of their nature, value, or method of recording. Compare "representative item sampling".

Spending variance

In standard cost systems, the spending variance is the rate or price variance for overhead costs.

Split

The split means the stock split. It is sometimes called "split-up".

Splitoff point

The splitoff point is, in accumulating and allocating costs for joint products, the point at which all costs are no longer joint costs but at which an analyst can identify costs associated with individual products or perhaps with a smaller number of joint products.

Spoilage

See "abnormal spoilage" and "normal spoilage".

Spreadsheet

The spreadsheet was a term for many years that referred specifically to a work sheet organized like a matrix that provides a two-way classification of accounting data. The rows and columns both have labels, which are account titles. An entry in a row represents a debit, whereas an entry in a column represents a credit. Thus, the number "100" in the "cash" row and the "accounts receivable" column records an entry debiting cash and crediting accounts receivable for $100. A given row total indicates all debit entries to the account represented by that row, and a given column total indicates the sum of all credit entries to the account represented by the column. Since personal computer software has become widespread, this term refers to any file created by programs such as Lotus 1-2-3 and Microsoft Excel. Such files have rows and columns, but they need not represent debits and credits.

Stakeholders

The stakeholders are groups or individuals, such as employees, suppliers, customers, shareholders, and the community, who have some interest, directly financial or nonfinancial, in the activities of an organization.

Standard cost

The standard cost is an anticipated cost of producing a unit of output and a predetermined cost to be assigned to products produced. Standard cost implies a norm - what costs should be. Budgeted cost implies a forecast - something likely, but not necessarily, a "should", as implied by a norm. Firms use standard costs as the benchmark for gauging good and bad performance. Although a firm may similarly use a budget, it need not. A budget may be a planning document, subject to changes whenever plans change, whereas standard costs usually change annually or when technology significantly changes or costs of labor and materials significantly change.

Standard costing

The standard costing is the costing based on standard costs.

Standard costing system

The standard costing system is the product costing using standard costs rather than actual costs. The firm may use either full absorption or variable costing principles.

Standard error

The standard error, especially the standard error of regression coefficients, is a measure of the uncertainty about the magnitude of the estimated parameters of an equation fit with a regression analysis.

Standard manufacturing overhead

The standard manufacturing overhead is the overhead costs expected to be incurred per unit of time and per unit produced.

Standard price

The standard price is the unit price established for materials or labor used in standard cost systems.

Standard quantity allowed

The standard quantity allowed is the direct material or direct labor (inputs) quantity that production should have used if it produced the units of output in accordance with present standards.

Standby costs

The standby costs are a type of capacity cost, such as property taxes, incurred even if a firm shus down operations completely. Contrast with "enabling costs".

Stated capital

Te stated capital is an amount of capital contributed by shareholders. It is sometimes used to mean the legal capital.

Statement of cash flows

The statement of cash flows is a schedule of cash receipts and payments, classified by investing, financing, and operating activities. It is required by the FASB for all for-profit companies. Companies may report operating activities with either the direct method (which shows only receipts and payments of cash) or the indirect method (which starts with net income and shows adjustments for revenues not currently producing cash and for expenses not currently using cash). "Cash" includes cash equivalents such as Treasury bills, commercial paper, and marketable securities held as current assets. This is sometimes called the "funds statement".

Statement of Financial Accounting Concept

The Statement of Financial Accounting Concept, or SFAC, is one of a series of FASB publications in its conceptual framework for financial accounting and reporting. Such statements set forth objectives and fundamentals to be the basis for specific accounting and reporting standards.

Statement of Financial Accounting Standards

See "FASB".

Statement of financial position

The statement of financial position is synonymous with the balance sheet.

Statement of retained earnings

The statement of retained earnings is a statement that reconciles the beginning-of-period and the end-of-period balances in the retained earnings account. It shows the effects of earnings, dividend declarations, and prior-period adjustments.

Statement of significant accounting policies

The statement of significant accounting policies is a summary of the significant accounting principles used in compiling an annual report and is required by APB Opinion No. 22. This summary may be a separate exhibit or the first note to the financial statements.

Static budget

The static budget is the fixed budget developed for a set level of the driving variable, such as production or sales, which the analyst does not change if the actual level deviates from the level set at the outset of the analysis.

Status quo

The status quo is the events or cost incurrences that will happen or that a firm expects to happen in the absence of taking some contemplated action.

Step allocation method

See "step-down method".

Step cost

See "semifixed cost".

Step-down method

The step-down method is, in allocating service department costs, a method that starts by allocating the cost of one service department to production departments and to all other service departments. Then, the firm allocates the costs of a second service department, including costs allocated from the first, to production departments and to all other service departments except the first one. In this fashion, a firm may allocate the costs of all the service departments, including previous allocations, to production departments and to those service departments whose costs it has not yet allocated.

Stepped cost

See "semifixed cost".

Sterilized allocation

The sterilized allocation is the desirable characteristics of cost allocation methods. Optimal decisions result from considering incremental costs only and never require allocations of joint or common costs. A "sterilized allocation" causes the optimal decision choice not to differ from the one that occurs when the accountant does not allocate joint or common costs "sterilized" with respect to that decision. Arthur L. Thomas first used the term in this context. Because absorption costing requires that product costs absorb all manufacturing costs and because some allocations can lead to bad decisions, Thomas advocates that the analyst choose a sterilized allocation scheme that will not alter the otherwise optimal decision. No single allocation scheme is always sterilized with respect to all decisions. Thus, Thomas advocates that decisions be made on the basis of incremental costs before any allocations.

Stewardship

The stewardship is the principle by which management is accountable for the resources of an entity, for their efficient use, and for protecting them from adverse impact. Some theorists believe that accounting has as a primary goal aiding users of financial statements in their assessment of the performance of management in stewardship.

Stock

The stock is a measure of the amount of something on hand at a specific time. In this sense, contrast with "flow". See "inventory" and "capital stock".

Stock split

The stock split, also called the stock split-up, is the increase in the number of common shares outstanding resulting from the issuance of additional shares to existing shareholders without additional capital contributions by them. It does not increase the total value (or stated value) of common shares outstanding because the board reduces the par (or stated) value per share in inverse proportion. A three-for-one stock split reduces par (or stated) value per share to one-third of its former amount. A stock split usually implies a distribution that increases the number of shares outstanding by 20 percent or more.

Stockholders' equity

See "shareholders' equity".

Stockout

The stockout occurs when a firm needs a unit of inventory to use in production or to sell to a customer but has none available.

Stockout costs

The stockout costs are a contribution margin or other measure of profits not earned because a seller has run out of inventory and cannot fill an order by customers. A firm may incur an extra cost because of delay in filling an order.

Stores

The stores mean raw materials, parts, and supplies.

Strategic plan

The strategic plan is a statement of the method for achieving the goals of an organization.

Stratified sampling

The stratified sampling is, in choosing a sample, a method in which the investigator divides the entire population first into relatively homogeneous subgroups (strata) and then selects random samples from these subgroups.

Subject to

The term "subject to" means, in an auditor's report, the qualifications usually caused by a material uncertainty in the valuation of an item, such as future promised payments from a foreign government or outcome of pending litigation.

Subsidiary

The subsidiary is a company in which another company owns more than 50 percent of the voting shares.

Summary of significant accounting principles

See "statement of significant accounting policies".

Sunk cost

The sunk cost is the past cost that current and future decisions cannot affect and, hence, that are irrelevant for decision making aside from income tax effects. Contrast with "incremental costs" and "imputed costs". For example, the acquisition cost of machinery is irrelevant to a decision of whether to scrap the machinery. The current exit value of the machine is the opportunity cost of continuing to own it, and the cost of, say, the electricity to run the machine is an incremental cost of its operation. Sunk costs become relevant for decision making when the analysis requires taking income taxes (gain or loss on disposal of asset) into account, since the cash payment for income taxes depends on the tax basis of the asset. This term should be avoided in careful writing because of the ambiguity.

Supplementary statements

The supplementary statements, also called the supplementary schedules, are the statements in addition to the four basic financial statements, which include the balance sheet, income statement, statement of cash flows, and the statement of retained earnings.

T-account

The T-account is the account form shaped like the letter T with the title above the horizontal line. Debits appear on the left of the vertical line and credits on the right.

T-statistic

The t-statistic is, for an estimated regression coefficient, the estimated coefficient divided by the standard error of the estimate.

T-value

The t-value is, in a regression analysis, the ratio of an estimated regression coefficient divided by its standard error.

Take-home pay

The take-home pay is the amount of a paycheck and the earned wages or salary reduced by deductions for income taxes, Social Security taxes, contributions to fringe-benefit plans, union dues, and so on.

Take-or-pay contract

The take-or-pay contract is, as defined by SFAS No. 47, a purchaser-seller agreement that provides for the purchaser to pay specified amounts periodically in return for products or services. The purchaser mush make specified minimum payments even f it does not take delivery of the contracted products or services.

Tangible

The tangible has a physical form. Accounting has never satisfactorily defined the distinction between tangible and intangible assets. Typically, accountants define intangibles by giving an exhaustive list, and everything not on the list is defined as tangible. See "intangible asset" for such a list.

Target cost

The target cost is the standard cost. It is sometimes the target price less expected profit margin.

Target price

The target price is the selling price based on the value of customers in use, constrained by the prices of similar items of competitors

Tax

The tax is a nonpenal, but compulsory, charge levied by a government on income, consumption, wealth, or other basis, for the benefit of all those governed. The term does not include fines or specific charges for benefits accruing only to those paying the charges, such as licenses, permits, special assessments, admission fees, and tolls.

Tax shield

The tax shield is the amount of an expense, such as depreciation, that reduces taxable income but does not require working capital. This term sometimes includes expenses that reduce taxable income and use working capital.

Technology

The technology is the sum of the trade secrets and know-how of a firm, as distinct from its patents.

Temporary account

The temporary account is the account that does not appear on the balance sheet. It includes revenue and expense accounts, their adjuncts and contras, production cost accounts, dividend distribution accounts, and purchases-related accounts (which close to the various inventories). It is sometimes called a "nominal account".

Term structure

The term structure is a phrase with different meanings in accounting and financial economics. In accounting, it refers to the pattern of times that must elapse before assets turn into, or produce, cash and the pattern of times that must elapse before liabilities require cash. In financial economics, the phrase refers to the pattern of interest rates as a function of the time that elapses for loans to come due. For example, if six-month loans cost 6% per year and 10-year loans cost 9% per year, this is called a "normal" term structure because the longer-term loan carries a higher rate. If the 6-month loan costs 9% per year and the 10-year loan costs 6% per year, the term structure is said to be "inverted".

Terms of sale

The terms of sale are the conditions governing payment for a sale. For example, the terms 2/10, net/30 mean that if the purchaser makes payment within 10 days of the invoice date, it can take a discount of 2 percent from invoice price. In any event, the purchaser must pay the invoice amount within 30 days, or it becomes overdue.

Theory of constraints

The theory of constraints, or TOC, is the concept of improving operations by identifying and reducing bottlenecks in process flows.

Thin capitalization

The thin capitalization is a state of having a high debt-equity ratio. Under income tax legislation, the term has a special meaning.

Throughput contribution

The throughput contribution is the sales dollars minus the sum of all short-run variable costs.

Tickler file

The tickler file is a collection of vouchers or other memoranda arranged chronologically to remind the person in charge of certain duties to make payments (or to do other tasks) as scheduled.

Time-adjusted rate of return

See "internal rate of return".

Time cost

See "period cost".

Time deposit

The time deposit is the cash in bank earning interest. Contrast with "demand deposit".

Time-series analysis

See "cross-section analysis" for definition and contrast.

Times-interest earned

The times-interest earned is the ratio of pretax income plus interest charges to interest charges. See "ratio".

Total assets turnover

The total assets turnover is the sales divided by the average total assets.

Total quality management

The total quality management, or TQM, is the concept of organizing a company to excel in all its activities in order to increase the quality of products and services.

Traceable cost

The traceable cost is a cost that a firm can identify with or assign to a specific product. Contrast with a "joint cost".

Trade-in

The trade-in means acquiring a new asset in exchange for a used one and perhaps additional cash.

Trade secret

The trade secret is the technical or business information such as formulas, recipes, computer programs, and marketing data not generally known by competitors and maintained by the firm as a secret. It is theoretically capable of having an indefinite or finite life. A famous example is the secret process for Coca Cola, a registered trademark of the company. The firm will capitalize this intangible asset only if purchased and then will amortize it over a period not to exceed 40 years. If the firm develops the intangible internally, the firm will expense the costs as incurred and show no asset.

Trademark

The trademark is a distinctive word or symbol that is affixed to a product, its package, or its dispenser and that uniquely identifies the products and services of a firm. See "trademark right".

Trademark right

The trademark right is the right to exclude competitors in sales or advertising from using words or symbols that are so similar to the trademarks of a firm as possibly to confuse consumers. Trademark rights last as long as the firm continues to use the trademarks in question. In the US, trademark rights arise from use and not from government registration. They therefore have a legal life independent of the life of a registration. Registrations last 20 years, and the holder may renew them as long as the holder uses the trademark.

Trading on the equity

The trading on the equity is said of a firm engaging in debt financing. It is frequently said of a firm doing so to a degree considered abnormal for a firm of its kind. See "leverage".

Transaction

The transaction is a transfer (of more than promises - see "executory contract") between the accounting entity and another party or parties.

Transfer price

The transfer price is a substitute for a market, or arm's length, price used in profit, or responsibility center, accounting when one segment of the business sells to another segment. Incentives of profit center managers will not coincide with the best interests of the entire business unless a firm sets transfer prices properly.

Transfer-pricing problem

The transfer-pricing problem is the problem of setting transfer prices so that both buyer and seller have goal congruence with respect to the goals of the parent organization.

Transposition error

The transposition error is an error in record keeping resulting from the reversing the order of digits in a number, such as recording 32 for 23. If the only errors in a trial balance result from one or more transposition errors, then the difference between the sum of the debits and the sum of the credits will be divisible by nine. Not all such differences result from transposition errors.

Treasurer

The treasurer is the financial officer responsible for managing cash and raising funds.

Trial balance

The trial balance is a two-column listing of account balances. The left-hand column shows all accounts with debit balances and their total. The right-hand column shows all accounts with credit balances and their total. The two totals should be equal. Accountants compute trial balances as a partial check of the arithmetic accuracy of the entries previously made.

Turnover

The turnover is the number of times that assets, such as inventory or accounts receivable, are replaced on average during the period. Accounts receivable turnover, for example, is total sales on account for a period divided by the average accounts receivable balance for the period. See "ratio".

Turnover of plant and equipment

See "ratio".

Unadjusted trial balance

The unadjusted trial balance is the trial balance taken before the accountant makes adjusting and closing entries at the end of the period.

Unavoidable cost

The unavoidable cost is a cost that is not an avoidable cost.

Uncertainty

See "risk" for definition and contrast.

Uncollectible account

The uncollectible account is an account receivable that the debtor will not pay. If the firm uses the preferable allowance method, the entry on judging a specific account to be uncollectible debits the allowance for uncollectible accounts and credits the specific account receivable. See "bad debt expense".

Uncontrollable cost

The uncontrollable cost is the opposite of the controllable cost.

Underapplied overhead

The underapplied overhead, also called the underabsorbed overhead, is an excess of actual overhead costs for a period over costs applied, or charged, to products produced during the period. It is a debit balance remaining in an overhead account after the accounting assigns overhead to product.

Unexpired cost

The unexpired cost is an asset.

Unfavorable variance

The unfavorable variance is, in standard cost accounting, an excess of expected revenue over actual revenue or an excess of actual cost over standard cost.

Unit-level activities

The unit-level activities are activities that convert resources into individual products and services.

Unqualified opinion

See "auditor's report".

Unrealized holding gain

See "inventory profit" for definition and an example.

Unrealized gain (loss) on marketable securities

The unrealized gain (loss) on marketable securities is an income statement account title for the amount of gain (loss) during the current period on the portfolio of marketable securities held as trading securities. SFAS No. 115 requires the firm to recognize in the income statement gains and losses caused by changes in market values, even though the firm has not yet realized them.

Unrecovered cost

The unrecovered cost is the book value of an asset.

Unused capacity

The unused capacity is the difference between resources supplied and resources used.

Usage variance

The usage variance means the efficiency variance.

Value

The value means the monetary worth. This term is usually so vague that it should not be used without a modifying adjective unless most people would agree on the amount. It should not be confused with cost. See "fair value" and "exit value".

Value added

The value added is the cost of a product or work-in-process minus the cost of the material purchased for the product or work-in-process.

Value-added activity

The value-added activity is any activity that increases the usefulness to a customer of a product or service.

Value chain

The value chain is the set of business functions that increase the usefulness to the customer of a product or service, typically including research and development, design of products and services, production, marketing, distribution, and customer service.

Value engineering

The value engineering is an evaluation of the activities in the value chain to reduce costs.

Value variance

See "price variance".

Variable budget

See "flexible budget".

Variable costing

The variable costing is, in allocating costs, a method that assigns only variable manufacturing costs to products and treats fixed manufacturing costs as period expenses. Contrast with "full absorption costing".

Variable costs

The variable costs are costs that change as activity levels change. Strictly speaking, variable costs are zero when the activity level is zero. See "semivariable costs". In accounting, this term most often means the sum of direct costs and variable overhead.

Variable overhead efficiency variance

The variable overhead efficiency variance is the standard price times the difference between the actual quantity and standard quantity of overhead used.

Variable overhead variance

The variable overhead variance is the difference between the actual and standard variable overhead costs.

Variables sampling

The variables sampling is the use of a sampling technique in which the sampler infers a particular quantitative characteristic of an entire population from a sample (e.g., the mean amount of accounts receivable). See also "estimation sampling" and "attribute sampling".

Variance

The variance is the difference between the actual and standard costs or between the budgeted and actual expenditures or, sometimes, expenses. The word has completely different meanings in accounting and in statistics, where it means a measure of dispersion of a distribution.

Variance analysis

The variance analysis means the variance investigation. This term differs in meaning if used in statistics.

Variance investigation

The variance investigation is a step in managerial control processes. Standard costing systems produce variance numbers of various sorts. These numbers seldom exactly equal to zero. Management must decide when a variance differs sufficiently from zero to study its cause. This term refers both to deciding when to study the cause and to study itself.

Variation analysis

The variation analysis is the analysis of the causes of changes in financial statement items of interest such as net income or gross margin.

Verifiable

Being verifiable is a qualitative objective of financial reporting specifying that accountants can trace items in financial statements back to underlying documents - supporting invoices, cancelled checks, and other physical pieces of evidence.

Verification

The verification is the auditor's act of reviewing or checking items in financial statements by tracing back to underlying documents - supporting invoices, cancelled checks, and other business documents - or sending out confirmation to be returned.

Vertical analysis

The vertical analysis is the analysis of the financial statements of a single firm or across several firms for a particular time, as opposed to horizontal or time-series analysis, in which the analyst compares items over time for a single firm or across firms.

Vertical integration

The vertical integration is the extension of activity by an organization into business directly related to the production or distribution of the end products of the organization. Although a firm may sell products to others at various stages, a vertically integrated firm devotes the substantial portion of the output at each stage to the production of the next stage or to end products. Compare "horizontal integration".

Visual curve fitting method

The visual curve fitting method is one crude form of cost estimation. Sometimes, when a firm needs only rough approximations of the amounts of fixed and variable costs, management need not perform a formal regression analysis but can plot the data and draw in a line that seems to fit the data. Then, it can use the parameters of that line for the rough approximations.

Volume variance

The volume variance means the production volume variance. Less often, it is used to mean the sales volume variance.

Voucher

The voucher is a document that signals recognition of a liability and authorizes the disbursement of cash. It is sometimes used to refer to the written evidence documenting an accounting entry, as in the term "journal voucher".

Wage

The wage is the compensation of employees based on time worked or output of product for manual labor. But see "take-home pay".

Warning signal

The tools used to identify quality control problems can either merely signal a problem (warning) or both signal a problem and suggest its cause (diagnostic).

Warranty

The warranty is a promise by a seller to correct deficiencies in products sold. When the seller gives warranties, proper accounting practice recognizes an estimate of warranty expense and an estimated liability at the time of sale. See "guarantee" for contrast in proper usage.

Waste

The waste is a material that is a residue from manufacturing operations and that has no sale value. Frequently, this has negative value because a firm must incur additional costs for disposal.

Wasting asset

The wasting asset is a natural resource having a limited useful life and, hence, subject to amortization, called depletion. Examples are timberland, oil and gas wells, and ore deposits.

Weighted average

The weighted average is an average computed by counting each occurrence of each value, not merely a single occurrence of each value. Contrast with "moving average".

Weighted average cost of capital

The weighted average cost of capital is a measure of the cost of capital of a firm. One should not confuse the measurement of the cost, often derived from the cost of the components on the right side of the balance sheet, with the cost itself, which is the opportunity cost of the assets on the left side of the balance sheet.

Weighted-average inventory method

The weighted-average inventory method is the method valuing either withdrawal or ending inventory at the weighted-average purchase price of all units on hand at the time of withdrawal or of computing ending inventory. The firm uses the inventory equation to calculate the other quantity. If a firm uses the perpetual inventory method, accountants often call it the moving average method.

Window dressing

The window dressing is the attempt to make financial statements show operating results, or financial position, more favorable than they would otherwise show.

Work-in-process

The work-in-process is the partially completed product and appears on the balance sheet as inventory.

Working capital

The working capital is the current assets minus current liabilities. It is sometimes called the net working capital or the net current assets.

Working papers

The working papers, also called the work papers, are the schedules and analyses prepared by the auditor in carrying out investigations before issuing an opinion on financial statements.

Worth

The worth means the value. See "net worth".

Write down

Writing down means writing off, except that the firm does not charge all the cost of assets to expense or loss. This term is generally used for nonrecurring items.

Write off

Writing off means charging an asset to expense or loss, i.e., debiting expense or loss and crediting an asset.

Yield

The yield is the internal rate of return of a stream of cash flows. The cash yield is cash flow divided by book value. See also "dividend yield".

Yield to maturity

The yield to maturity is, at a given time, the internal rate of return of a series of cash flows. It is usually said of a bond and sometimes called the "effective rate".

Yield variance

The yield variance measures the input-output relation while holding the standard mix of inputs constant: (standard price multiplied by actual amount of input used in the standard mix) - (standard price multiplied by standard quantity allowed for the actual output). It is the part of the efficiency variance not called the mix variance.

Zero-base budgeting

The zero-base budgeting, also called the zero-based budgeting or ZBB, is one philosophy for setting budgets. In preparing an ordinary budget for the next period, a manager starts with the budget for the current period and makes adjustments as seem necessary because of changed conditions for the next period. Since most managers like to increase the scope of the activities managed and since most prices increase most of the time, amounts in budgets prepared in the ordinary, incremental way seem to increase period after period. The authority approving the budget assumes that managers will carry out operations in the same way as in the past and that the expenditures in the next period will have to be at least as large as those of the current period. Thus, this authority tends to study only the increments to the budget of the current period. In ZBB, the authority questions the process for carrying out a program and the entire budget for the next period. The authority studies every dollar in the budget, not just the dollars incremental to the amounts in the previous period. The advocates of ZBB claim that in this way, (1) management will more likely delete programs or divisions of marginal benefit to the business or governmental unit, rather than continuing with costs at least as large as the present ones, and (2) management may discover and implement alternative, more cost-effective ways of carrying out programs. ZBB implies questioning the existence of programs and the fundamental nature of the way that firms carry them out, not merely the amounts used to fund them. Experts appear to divide evenly as to whether the middle word should be "base" or "based".