Terms and Definitions- Accountant Glossary

7/29/2019 Terms and Definitions- Accountant Glossary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

index

qualified dividends

holding period

mutual fund

preferred stockdepletion

capital investment

income

gross income

tax benefits

return of capital

cost basis

earnings

chapter 11 bankruptcy

chapter 7 bankruptcy

Return on Net Assets(RONA) profitability ratio

mergerenterprise value

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

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

creditor

financing activities

investing activities

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

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

external decision makers

management/managerialaccounting

financial accounting

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

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

accounting period - the time period covered by the financial statements


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Old vs. New Usage:

Four elements that meet IFRS financial statements:Balance sheet is now Statement of Financial Position

Income Statement/Profit & Loss Statement is now Statement of Comprehensive Income (1 to 2)

Statement of Retained Earnings is now Statement of Changes in Equity

Statement of Cash Flow remains the same

Terms and Definitions- Accountant Glossary

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