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 INTRODUCTION TO FINANCIAL ACCOUNTING

 Annual Report
 Annual Report a combination of financial statement, management discussion  and analysis, and graphs and charts that is provided annually to investors.

 Balance Sheet
 (Statement of financial position, statement of financial condition)
 A financial statement that show the financial status of business entity at a  particular instant in time.

 Assets
 Economic resources that are expected to benefit future cash inflow or help  reduce future cash out flows.

 Liabilities
 Economic obligations the organization to out side or claims against it assets  by out side.

 Notes Payable
 Promissory notes but are evidence of adepts and state the term of payment.

 Owner's Equity
 The residual interest in or remaining clam against, the organization's assets  after deducting liabilities.

 GAAP
 A term that applies to the broad concepts or guidelines and detailed  practices in accounting, including all the conventions, rules, and procedures  that together make up accepted accounting practice at a given time.

 Entity (Entity Concept)
 An organization or a section of an organization that stance apart from her  organization and individuals as a separate economic unit.

 Reliability
 The quality of information that assures decision makers that the information  captures the
 conditions or events it purports to represent.

 Transaction
 Any event that both affects the financial position of an entity and can be  reliably recorded in money terms.

 Inventory
 Goods held by a company for the purpose of sale to customers.

 Account
 A summary record of the changes in a particular asset, liability, or owner'  equity.

 Open account
 Buying or selling on credit, usually by just an "authorized signature" of the  buyer.

 Account payable
 A liability that results from a purchase of goods or services on open account.

 Compound entry
 A transaction that affects more than two account.

 Capital
 A term used to identify owners` equities for proprietorships and partnerships.

 Operating cycle
 The time span during which cash is used to acquire goods and services, which  in turn are sold to customers, who in turn pay for their purchases with cash.

 Fiscal year
 The year established for accounting purposes. Fiscal year 12month periods.

 Interim periods
 The time span established for accounting purposes that are less tan a year.

 Revenues
 Gross increases in owners` equity arising from increases in assets received in  exchange for the delivery of goods or services to customers.

 Expenses
 Decreases in owners` equity that arise because goods or services are delivered  to customers.

 Income (profit, earnings)
 The excess or revenues over expenses.

 Retained income
 Additional owners` equity generated by income or profits.

 Accrual basis
 Recognizes the impact of transactions on the financial statements in the time  periods en revenues and expenses occur.

 Cash basis
 Accounting method that recognizes the impact of transactions on the financial  statements only when cash is received or disbursed.

 Recognition
 A test for determining whether revenues should be recorded in the financial  statements of a given period. To be recognized, revenues must be earned  and realized.

 Product costs
 Costs that are linked with revenues and are charged as expenses when the  related revenue is recognized

 Matching
 The recording of expenses in the same time period as the related revenues  are recognized.

 Period costs
 Items identified directly as expenses of the time period in which they are  incurred.

 Cost recovery
 The concept by which some purchases of goods or services are recorded as  assets because their costs are expected to be recovered in the form of cash  inflow (or reduced cash outflows) in future periods.

 Double-entry system
 The method usually followed for recording transactions, whereby at least two  accounts are always affected by each transaction.

 Ledger
 A group of related accounts kept current in a systematic manner.

 General ledger
 The collection of accounts that accumulates the amounts reported in the  major financial statements.

 T-account
 Simplified version of ledger accounts that takes the form of the capital letter  T.

 Balance
 The difference between the total left-side and right-side amounts in an  account at any particular time.

 Debit
 An entry or balance on the left side of an account.
 Credit An entry or balance on the right side of an account.

 Charge
 A word often used instead of debit.

 Amortization
 The systematic write-off to expense of the cost of an intangible asset over the  period of its economic usefulness.

 Depletion
 Allocating the cost of a natural resource to the units removed as the resource  is mined, pumped cut or otherwise consumed.

 Patents
 A patent is an exclusive right granted by the federal government of  manufacture, use and sale of a particular product.

 Intangibles
 Those assets which are used in the operation of a business but which have no  physical substance and are non current.

Intangible assets
Rights or economic benefits, such as franchises, patents, trademarks, copyrights, and goodwill, those are not physical in nature.

Interest coverage
Income before interest expense and income taxes divided by interest expense.

Interest period
The time period over which the interest rate applies.

Interest rate
The percentage applied to a principal amount to calculate the interest charged.

Interim periods
The time span established for accounting purpose the are less than a year.

Internal control
A system of both internal administrative control and internal accounting control.

Interperiod tax allocation: see tax deferral.

International accounting standards committee (IASC)
An organization representing over one hundred accountancy boards from over seventy-five countries that is developing a common set of accounting standard to be used throughout the world.

Inventory
Goods held by a company for the purpose of sale to customers.

Inventory: see holding again.

Inventory shrinkage
Difference between (a) the value of inventory that would occur if there were no theft, breakage, or losses of inventory and (b) the value of inventory when it is physically counted.

Interperiod tax allocation: see tax deferral.

Inventory turnover
The cost of goods sold divided bye the average inventory held during the period.

Investing activities
Activities that involve (1) providing and collecting cash as a lender or as and owner of securities and (2)acquiring and disposing of plant,property,equipment,and other long –term productive assets.
Inward transportation: see freight in.

Issued shares
The aggregate number f shares potentially in hands of share holders.

Journal entry
An analysis of the effects of a transaction on the accounts, usually accompanied by explanation.

Journalizing
The process of entering transactions into journal.

Keying of entries
The process of numbering or otherwise specifically identifying each journal entry and each posting.

Last in, first out (LIFO)
This inventory method assumes that the units acquired most recently are used or sold first.

Lease
A contract whereby an owner (lesser) grants the use of property to a second party (lesse) for rental payments.

Leasehold improvements:
Investment by a lesse in items that are not permitted to be removed from the premises when a lease expires, such as installation of new fixtures,panles,wallsand air conditioning equipment.

Leasehold:
The right to use a fixed asset for a specified period time, typically beyond one year.

Ledger:
A group of related accounts kept current in a systematic manner.

Leveraging:
See trading on the equity.

Liabilities:
Economic obligations of the organization to outsiders or claims against its assets by outsiders.

Licenses: see franchises.

LIFO increment: see LIFO layer.

LIFO layer: a separately identifiable additional segment of LIFO inventory.

LIFO reserve: the differences between a company `s inventory valued at LIFO and what it would be under FIFO.

Limited liability: a feature of the corporate form of organization whereby corporate creditors ordinarily have claims against the corporate assets only .the owners personal assets are not subject to the creditors grasp.

Line of credit: an arrangement to a bank to provide automatically short term loans up to some reestablished maximum.

Liquidating value: a measure of the preferences to receive assets in the event of corporate liquidation.

Long lived assets: resources that are held for an extended item, such as land, buildings, equipment, natural resources, and patents.

Long term liabilities: obligations that fall due beyond one year from the balance sheet date.

Long term solvency: an organization’s ability to generate enough cash to repay long term debts as they mature.

Lower of cost or market method (LCM)
The superimposition of a market-price test on an inventory cost method.

Management accounting:
The field of accounting that servers internal decision maker, such as top executives, department heads, college deans, hospital administrators, and people at other management levels with in an organization.

Management reports:
Explicit statements in annual reports of publicly held companies that stare management is responsible for all audited and UN audited information in the annual report.

Management’s discussion and analysis (MD&A)
A required section of annual reports that concentrates on explaining the major changes in the income statement and the major changes in liquidity and capital resources.

Market rates:
See yield to maturity.

Marketable securities:
Any notes, bonds, or stocks that can readily be sold via markets. The term is often used as a synonym for short-term investments.

Matching:
The recordings of expenses in the same time period as the related revenues are recognized.

Materiality convention:
The concept that states that a financial statement item is material if its omission or misstatement would tend to mislead the reader of the financial statements under consideration.

Minority interests:
The outside shareholders interest as opposed to the parent’s interest, in a subsidiary corporation.

Modified accelerated cost recovery system (MACRS)
The basis for computing depreciation for tax purposes in the United States. it is based on arbitrary”recovery”periods instead of useful lives.

Mortgage bond:
A form of long term debt that is secured by the pledge of specific property.

Multiple step income statement:
An income statement that contains one or more subtotals that highlight significant relationships.

Municipal bond interest:
Interest paid by states and local governments that is not treated as taxable income by the United States government.

Net book value: see book value.

Net income:
The remainder after all expenses have been deducted revenues.

Net operating loss (NOL)
An operating loss for tax purposes that can be carried back three years or forward fifteen years offset taxable income in other years.

Net sales
Total sales revenue reduced by sales returns and allowances.

Neutrality
Choosing accounting policies without attempting to achieve purposes other than measuring economic impact freedom from bias.

Nominal dollars:
Those dollar s that are not restated for fluctuations in the general purchasing power of the monetary unit.

Nominal interest:
A contractual rate of interest paid on bonds.

Notes payable:
Promissory notes that are evidence of a debt and state the terms of payment.

Open account:
Buying or selling on credit, usually by just an “authorized signature” of the buyer.

Operating activities:
Transaction that affect the income statement.

Operating cycle:
The time span during which cash is used to acquired good and services which in turn are sold to customers, who in turn pay for their purchases with cash.

Operating income:
Gross profit less all operating expenses.

Operating income percentage on sales: Operating income divided by sales.

Operating lease:
A lease that should be accounted for by the lessee as ordinary rent expenses.

Operating management:
Is mainly concerned with the major day to day activities that generate revenues and expenses.

Operating profit: see operating income.

Operating statement: see statement of income.

Other postretirement benefits:
Benefits provided to retired workers in addition to a pension such as life and health insurance.

Output controls:

An internal accounting control that’s check output against input and ensure that only authorized persons receive reports.

Outstanding shares:
Shares in the hands shareholders equal to issued shares less treasury shares.

Owners equity:
The residual interest in or remaining claim against the organization’s assets after deducting liabilities.

P&L STATEMENT: see statement in income

Paid in capital:
The total capital investment in a corporation by its owners at the inception of business and subsequently.

Paid in capital in excess of par value:
When issuing stock, the difference between the total amount received and the per value.

Par value: The nominal dollar amount printed on stock certificates. see face amount.

Parent company
A company owning more the 50% of the voting shares of another company, called the subsidiary company.

Participating:
A characteristics of preferred stock that provides increasing dividends when common dividends increase.

Partnership:
A special form of organization that joins two or more individuals together as co –owners.

Patents:
Grants by federal government to an inventor, bestowing (in United States) the exclusive right for 17 years to produce and sell the invention.

Payment date:
The date dividends are paid.

Pensions:
Payments to former employees after the retire.

Percentage of accounts receivable method:
An approach to estimating bad debts expense and uncollectible accounts at year end using the historical relations of uncollectible to accounts receivable.

Percentage of sales method:
An approach to estimated bad debts expense and uncollectible accounts based on the historical relations between credit sales uncollectible.

Period cost:
Items identified directly as expenses of the time period in which they are inccured.

Periodic inventory system:
The system in which the cost of goods sold is computed periodically by relying solely on physical counts without keeping day-to-day records of units sold or on hand.

Permanent accounts: Balance sheet accounts.

Permanent differences:
Differences between pretax income as reported to shareholders and taxable income as reported to the government because a revenue or expense item is recognized for one purpose but not the other.

Perpetual inventory system:
A system that keeps a running, continuous record that tracks inventories and the cost of goods sold on a day to day basis.

Physical capital maintenance:
A concept of income measurement whereby income emerges only after recovering an amount that allows physical operating capability to be maintained.

Physical count:
The process of counting all the items in inventory at a moment in time.

Plant assets: see tangible assets.

Pooling –of - interest method:
A way of accounting for the combination of two corporations based on the book values of the acquired company’s net assets, as distinguished from the purchase method.

Posting:
The transferring of amounts from the journal to the appropriate accounts in the ledger.

Preemptive rights:
The rights to acquire a pro-data amount of any new issues of capital stock.
Preferred stock:
Stock that has some priority over other shares regarding dividends or the distribution of assets upon liquidation.

Premium on bonds:
The excess of the proceeds over the face amount of a bond.

Present value:
The value today of a future cash inflow or outflow.

Pretax income:
Income before income taxes.

Pretax operating rate of return on total assets:
Operating income divided by average total assets available.

Primary EPS:
EPS calculated as if all common stock equivalents that dilute EPS were converted to common stock.

Private accounting:
Accountants who work for business, government agencies and other nonprofit organizations.

Private placement:
A process whereby notes are issued by corporations when money is borrowed from a few sources, not from the general public.

Privately owned:
A corporation owned by a family, a small group of shareholders, or a single individual, in which shares of ownership are not publicly sold.

Pro forma statement:
A carefully formulated expression of predicted results.

Processing controls:
Internal accounting controls relating to the design, programming, and operation of the system.

Product costs:
Costs that are linked with revenue and are charged as expenses when the related revenue is recognized.

Professional corporation
A form of corporation providing professional people some corporate benefits without limited liability.

Profit: see income.

Profitability evaluation:
The assessment of the likelihood that a company will provide investors with a particular rate return on their investment.

Promissory note:
A written promise to repay principal plus interest at specific future dates.

Protective covenant:
A provision dated in a bond, usually to protect the bondholders’ interests.

Public accounting:
The field of accounting where services are offered to the general public on a free basis.

Publicly owned:
A corporation in which shares in the ownership are sold to the public.

Purchase allowance: see sales allowance.

Purchase method:
A way of accounting for the acquisition of one company by another; based on the market prices paid for the acquired company’s assets.

Purchase returns: see sales returns.

Rate of return on common equity (ROE)
Net income less preferred dividends divided by average common equity.

Rate of return on stockholders equity (ROE)
Net income divided by average common stockholders equity.

Raw material inventory:
Includes the cost of materials held for use in the manufacturing of a product.

Receivables:
See accounts receivables .

Recognition:
A test for determining whether revenues should be recorded in the financial statements of a given period. to be recognized revenues must be earned and realized.

Reconcile a bank statement:
To verify that the bank balance for cash is consistent with the accounting records.

Redemption price:
The call price which is typically 5% to 10% above the per value of the bond or stock.

Registered instrument:
Bonds that require the interest and maturity payments to be made to specific owners.

Reinvested earnings: see retained earnings.

Relevance:
The capability of information to make difference to the decision maker.

Reliability:
The quality of information that assures decision makers that the information captures the conditions or events it purports to represent.

Replacement cost:
The cost at which and inventory item could be acquired today.

Report format:
A classified balance sheet with assets.

Represtational faithfulness: see validity.

Reserve:
Has one of the three meanings (1)a restriction of dividend declaring power as denoted by a specific subdivision of retained income,(2)an offset to an asset, or (3)an estimate of a definite liability of indefinite or uncertain amount.

Reserve for doubtful accounts: see allowance for uncollectible accounts.

Residual value:
The amount received from disposal of a long lived asset at the end of its useful life.

Restricted retained income:
A part of retained income that may not be reduced by dividend declarations.

Result of operations: see statement if income.

Retail method: see retail inventory method.

Retail inventory method:
A popular inventory costing method based on sales prices, often used as a control device and for obtaining an inventory calculation for the financial purposes.

Retailer:
A company that sells items directly to the final users, individuals .
Retained earnings:
A synonym for retained income.

Retained income:
Additional owners` equity generated by income or profits.

Returned on sales ration:
Net income divided by sales.

Return on stockholder’s equity ratio.
Net income divided by invested capital(measured by average stockholders equity).

Return on total assets (ROA)
Income before interest expense divided by average total assets.

Revaluation equity:
A part of stockholders equity that includes all holdings gains that are excluded from income.

Revenues:
Gross increases in owner’s equity arising from increases in assets received in exchange for the delivery of goods or services to customers.

Reversing entries:
Entries that switch back all debits and credits made in a related preceding adjusting entry.

Sales: a synonym for revenues.

Sales allowance:
Reduction of the selling price (the original price previously agreed upon).

Sales returns:
Products returned by the customer.

Sales revenues: see sales.

Salvage value: see residual value.

Scrap value: see residual value.

Securities and Exchange Commission (SEC)
The agency designated by the U.S congress to hold the ultimate responsibility for authorizing the generally accepted accounting principles for companies’ whose stock is held by the general investing public.

Series:
Different groups of preferred shares issued at different times with different features.

Shareholders equity: see stockholders equity.

Short term debt securities:
Largely notes and bonds with maturities of one year or less.

Short term equity securities:
Capital stock in other corporations held with the intention to liquidate with in one year as needed.

Short term investment :
A temporary investment in marketable securities of otherwise idle cash.

Short term liquidity:
An organization’s ability to meet current payments as they become due.

Simple entry
An entry for a transaction that affects only two accounts.

Simple interest
For any period, intrest rate multiplied by an unchanging principal amount.

Single step income statement
An income statement that groups all revenues together and then lists and deducts all expenses together without drawing any intermediate subtotals

Sinking fund
Cash or securities segregated for meeting obligations on bonded debt.

Sinking fund bonds
Bonds with indentures that require the issuer to male annual payments to a sinking fund.

Sole proprietorship
A separate organization with a single owner.