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88 Cards in this Set
- Front
- Back
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accounts receivable
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An asset that reports amounts generated by credit sales that are still owed to an organization by its customers.
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net realizable value
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Net Realizable Value = Accounts Receivable - Allowance for Bad Debts
The amount of cash that is expected to be generated by an asset after costs necessary to obtain the cash are removed; as related to accounts receivable, the amount an organization estimates it will ultimately collect from its customers. |
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allowance for doubtful accounts
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A contra asset account reflecting the estimated amount of accounts receivable that will eventually fail to be collected and, thus, written off as uncollectible.
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contra account
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Offset to an account that reduces the total balance to a net amount; in this chapter, the allowance for doubtful accounts always reduces accounts receivable to the amount expected to be collected.
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bad debt expense
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Estimated expense from making credit sales to customers who will never pay; because of the matching principle, recorded in the same period as the sales revenue.
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percentage of sales method
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The income statement approach for estimating uncollectible accounts that computes bad debt expense by multiplying credit sales by the percentage that are not expected to be collected.
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percentage of receivables method
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The balance sheet approach for estimating uncollectible accounts that computes the allowance for doubtful accounts by multiplying accounts receivable by the percentage that are not expected to be collected.
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aging method
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Variation of percentage of receivables method where all receivables are categorized by age; the total of each category is multiplied by an appropriate percentage and then summed to determine the allowance balance.
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subsidiary ledger
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Group of individual accounts whose sum totals (and, therefore, explains) a general ledger account balance.
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monetary assets and monetary liabilities
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Amounts currently held by an organization as cash in addition to amounts that will provide future receipts or payments of a specified amount of cash.
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current ratio
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Formula measuring an organization’s liquidity (the ability to pay debts as they come due); calculated by dividing current assets by current liabilities.
Current Assets / Current Liabilities |
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working capital
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Formula measuring an organization’s liquidity (the ability to pay debts as they come due); calculated by subtracting current liabilities from current assets.
Current Assets - Current Liabilities |
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receivables turnover
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Formula measuring speed of an organization’s collections of its accounts receivable; calculated by dividing sales by the average accounts receivable balance for the period.
Sales / Average Accounts Receivable Balance |
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average age of accounts receivable
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Formula measuring the average length of time it takes to collect cash from sales; calculated by dividing average accounts receivable for the period by sales per day.
Avg. Acct. Receivable/ Sales per Day |
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liabilities
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Future sacrifices of economic benefits arising from present obligations; the debts of an organization.
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current liabilities
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Debts that will be satisfied within one year from the date of a balance sheet.
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noncurrent liabilities
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Debts that will not be satisfied within one year from the date of a balance sheet.
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current ratio
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Formula measuring an organization’s liquidity (the ability to pay debts as they come due); calculated by dividing current assets by current liabilities.
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accrued liabilities
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Liabilities that grow gradually because of the passage of time; common examples include salaries and interest.
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gift card liability
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An obligation arising when a business accepts cash in exchange for a card that can be redeemed for a specified amount of assets or services.
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commitment
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An unexecuted contract such as for the future purchase of inventory at a set price; necessitates disclosure of extensive information in the financial statement footnotes although amounts are not reported on the balance sheet or income statement because no transaction has yet occurred.
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contingency
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A potential gain or loss that might arise as a result of a past event; uncertainty exists as to likelihood of the gain or loss occurring and the actual amount, if any, that will result.
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loss contingency
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A potential loss resulting from a past event that must be recognized on an entity’s financial statements if it is deemed probable and the amount involved can be reasonably estimated.
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gain contingency
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A potential gain resulting from a past event that is not recognized in the financial statements until it actually occurs due to the principle of conservatism.
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embedded product warranty
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An obligation established by the sale of a product where the seller promises to fix or replace the product if it proves to be defective.
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extended product warranty
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An obligation whereby the buyer of a product pays the seller for the equivalent of an insurance policy to protect against breakage or other harm to the product for a specified period of time.
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working capital
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Formula measuring an organization’s liquidity (the ability to pay debts as they come due); calculated by subtracting current liabilities from current assets.
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age of accounts payable
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A determination of the number of days that a company takes to pay for the inventory that it buys;
Accounts Payable / Avg. Inventory Purchases per day. |
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interest
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The charge for using money over time, often associated with long-term loans; even if not specifically mentioned in the debt agreement, U.S. GAAP requires it to be computed and reported based on a reasonable rate.
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present value
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The value of future cash flows with all future interest computed at a reasonable rate and then removed; the remainder is literally the present value of those future cash flows.
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annuity
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A series of equal payments made at equal time intervals.
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ordinary annuity
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Annuity with payments made at the end of each period; it is also called an annuity in arrears.
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annuity due
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Annuity with payments made at the beginning of each period; it is also called an annuity in advance.
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bankruptcy
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A formal court process that often results in the liquidation of a company that cannot pay its liabilities as they come due; in some cases, bankrupt companies are allowed to reorganize their finances and operations so that liquidation is not deemed to be necessary.
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financial leverage
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A company’s ability to earn more on borrowed money than the associated interest cost on those funds; often viewed as a wise business strategy although risks (such as possible bankruptcy) are higher.
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maturity value
(Face Value) |
Amount of a note or bond to be repaid at the end of the contract; it serves as the basis for computing interest payments and is also known as face value.
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note
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A written contract to convey money as a loan at a specified interest rate and repayment schedule between two parties.
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bond
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A written contract created by a debtor that is sold (often to members of the general public) to raise money.
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term notes or term bonds
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Bonds that mature at a single specified future date.
A type of debt instrument where interest is paid at regular time intervals with the entire maturity value due at the end of the contract period. |
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serial debts
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A type of debt instrument where a set amount is paid each period to cover both interest and a portion of the maturity value; home mortgages and automobile loans are common examples.
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stated interest rate
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Rate established in a debt contract to be paid by the debtor usually at specified time intervals; it is also called cash rate, contract rate or coupon rate.
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debenture
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Unsecured bonds that are issued against the general credit of the borrower.
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covenants
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Promises made by the debtor in a debt contract to help ensure that sufficient money will be available to make required payments at the scheduled times.
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zero-coupon bond
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Bonds that include no interest payments although the entire maturity value is due at the end of a specified time; these debts are issued at a discount so that the difference between the cash paid at the beginning and the cash received on the maturity date represents interest over that time period.
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effective rate
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The interest rate determined by negotiation and market forces that is used to set the price of bonds; it is also called the yield rate or negotiated rate and often varies from the stated interest rate used to establish cash interest payments.
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lessee
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A party that pays cash for the use of an asset in a lease contract.
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capital lease
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A rental agreement where the benefits and risks of ownership are conveyed from the lessor to the lessee; for accounting purposes, it exists when one of four established criteria are met.
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off-balance sheet financing
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Description used when an entity is obligated for an amount of money that is larger than the amount reported on its balance sheet; for a lessee, an operating lease provides a common example of off-balance sheet financing.
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lessor
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A party that receives cash for granting use of owned property in a lease contract.
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operating lease
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A rental agreement where the benefits and risks of ownership are not conveyed from the lessor to the lessee.
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proprietorship
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A business created, owned, and operated by a single individual; business is not legally separate from its owner through incorporation; it is also referred to as a sole proprietorship.
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partnership
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A business created, owned, and operated by more than one individual; business is not legally separate from its owners through incorporation.
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corporation
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An organization that has been formally recognized by the state government as a legal entity so that it can sell ownership shares to raise money for capital expenditures and operations; business is legally separate from its owners through incorporation.
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mutual agency
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A characteristic of a partnership whereby any partner can obligate other partners to an agreement without their direct consent; does not have a parallel in corporate ownership.
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limited liability
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A legal characteristic associated with the ownership of a corporation whereby the maximum amount that can be lost is the owner’s capital investment; an attribute of the capital stock of a corporation that does not similarly exist with proprietorships or partnerships.
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double taxation
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A negative feature associated with the corporate form of organization; corporate earnings are taxed first when earned and then taxed again when distributed to owners in the form of dividends.
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common stock
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A type of capital stock that is issued by every corporation; it provides rights to the owner that are specified by the laws of the state in which the organization is incorporated.
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board of directors
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A group that oversees the management of a corporation; the members are voted to this position by stockholders; it hires the management to run the company on a daily basis and then meets periodically to review operating and financing results and also approve policy and strategy.
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authorized shares
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The maximum number of shares that a corporation can issue based on the articles of incorporation approved by the state government at the time of incorporation.
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issued shares
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The number of shares of a corporation that have been sold or conveyed to owners.
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outstanding shares
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The number of shares of a corporation that are currently in the hands of the public; it is the shares that have been issued since operations first began less any treasury shares repurchased and still held by the corporation.
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par value
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A number printed on a stock certificate to indicate the minimum amount of money owners must legally leave in the business; generally set at a low amount to avoid legal complications.
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treasury stock
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Issued shares of a corporation’s own stock that have been reacquired; balance is shown within stockholders’ equity section of the balance sheet as a negative amount unless the shares are retired (removed from existence).
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dividends
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Distributions made by a corporation to its shareholders as a reward when income has been earned; shareholders often receive favorable tax treatment when cash dividends are collected.
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date of declaration
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Date on which dividend payments are formally declared (approved) by the board of directors; it is the day on which a liability is recorded by the corporation.
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date of record
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Date on which stock must be held for a shareholder to be entitled to the receipt of a dividend; the date of record is specified by the board of directors when the dividend is declared.
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date of payment
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Date on which a cash dividend is distributed to those shareholders who held a corporation’s stock on the date of record; it is also known as the date of distribution.
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cumulative
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Feature attached to most types of preferred stock so that any dividend payments that are omitted one year must still be paid before the holders of common stock receive any dividends.
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stock split
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A division of each share of outstanding stock to increase the number of those shares; it is a method of reducing the market price of the stock; the process is carried out in hopes that a lower price will generate more market activity in the stock and, therefore, a faster rise in price.
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stock dividend
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A dividend distributed to shareholders by issuing additional shares of stock rather than cash; it increases the number of shares outstanding but each ownership percentage stays the same; as with a stock split, it reduces the price of the stock in hopes of stimulating market interest.
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capital in excess of par value
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Figure represents amount received by a corporation from the original issuance of capital stock that is in excess of par value; also called additional paid in capital.
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return on equity (ROE)
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Ratio computed to measure the profitable use of a business’s resources;
Net Income / Avg. Shareholder's Equity (for period) |
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price-earnings ratio (P/E ratio)
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It is used to help predict future stock prices based on anticipated EPS figures.
Current Market Price (of Entity's Stock) / Latest Earnings per Share |
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basic earnings per share (basic EPS)
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A figure that must be reported by corporations that have their stock publicly traded
(NI - Preferred Stock Dividends) / Weighted Avg. # of Shares of Common Stock Outstanding |
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preferred stock
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A capital stock issued by some companies that has one or more specified preferences over common shareholders, usually in the form of cash dividends.
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diluted earnings per share (diluted EPS)
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Hypothetical computation that reduces basic earnings per share to reflect the possible dilution if outstanding convertible items were actually turned into common stock; it includes the potential impact of stock options, convertible bonds and convertible preferred stock to warn decision makers of the consequences if those convertibles are turned into common stock.
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Bank Reconciliation
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A process by which to compare an entity's book cash balance with the bank's cash balance as of a given period to note any discrepancies.
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NSF Check
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Non-Sufficient Funds
-Returned when there are not enough funds in the customers account. |
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Present Value Formula
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PV = FV * PV Factor
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Present Value Annuity Formula
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PVa = Payment * Annuity Factor
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Annuity Factor Formula
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AF = (1 - (1 + R) ^ (-N)) / R
Where: N = # of periods R = Periodic Rate |
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Present Value Factor Formula
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PVf = 1 / ((1+R) ^ N)
Where: N = # of periods R = Periodic Rate |
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Serial Bonds
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Bonds that mature in installments
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Sales per Day
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SpD = Sales / 365
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Age of Receivables
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= Sales / Sales per Day
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Accounts Receivable Turnover
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Sales / Avg. AR
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Bond Indenture
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-Bond Contract Package
Contains: -Dates of interest payments -Rate of interest to be paid -Maturity Date Does not contain: -Cash to be received at issue |
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Advantage of Issuing Debt
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-Creation of positive Financial Leverage
-The interest is tax deductible -Debt can be eliminated in the future -It does not dilute ownership interest |
