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Glossary of Terms

This glossary provides definitions for many terms in finan- control cial accounting1 and refers readers back to those chapter The practice of creating accounting records that sections in which the terms are discussed. If a good defini- provide expected quantities of important and tion or discussion appears in a chapter section, the refer- liabilities and so improve the internal control over ence to that section may be provided without repeating those assets. Used by most companies for , the definition. Terms are cross-referenced to other terms accounts receivable, sales taxes collected on behalf of where helpful. For additional help in finding things, governments and employee deductions, and by many consult the index at the end of the book. Technical terms companies for investments, inventories, property and used in any definition are themselves defined in their equipment, and accounts payable. See Internal control and Section 7.9 for various examples of accounting alphabetical location in the glossary. control. Accounting entity A The enterprise for which the accounting is being done. Accelerated amortization () The entity may be a single legal corporation or other organization, an economic unit without legal standing An amortization method, such as declining balance, that (such as a proprietorship), or a group of corporations records more amortization in the earlier years of an with connected ownership for which consolidated finan- ’s life, and less in later years, than does the straight- cial statements are prepared. See Sections 5.2 and 9.7. line method. See Straight-line amortization, Declining balance amortization, and Section 8.12. Accounting policies Account The chosen accounting methods used by a company to recognize economic events on an basis, and to A summary record of an asset, liability, owners’ , report the financial position and results of operations. , or , in which the effects of transactions, For examples, see the notes immediately following the , and adjustments are indicated in dollars financial statements of any company. The first such note (where dollars are the currency of the country). See is usually a summary of significant accounting policies. , General , Transaction, and See Sections 1.1, 5.5, 6.4, 8.4, and 9.2. Sections 2.3, 2.4, and 2.5. Accounting policy choice A decision among acceptable accounting policies is A person who performs accounting functions. often needed because more than one acceptable policy Professional are those who are granted exists in many areas. See Sections 6.4, 8.1, and 10.8. designations by self-regulating bodies on the basis of special training and successful examination. For exam- Accounting principles ple: CA or Chartered Accountant (Canada, the United See Generally accepted accounting principles and Kingdom); CGA or Certified General Accountant Sections 1.1 and 5.1. (Canada); CMA or Certified Management Accountant (Canada, the United States); and CPA or Certified Public Accountant (the United States). See Section 1.5. The practice of studying accounting phenomena to determine their effects on other phenomena, such as Accounting share prices and the effects of those on accounting. “To account” is to provide a record, such as of funds paid Introduced in Section 1.5 and mentioned frequently or received for something. Being “accountable” is to be throughout the book. responsible for, as in to account for one’s actions. These two ideas together describe the practice of accounting as Accounting standards the recordkeeping and reporting of an enterprise’s The recommending of particular accounting methods performance and position in monetary terms. or policies by an authoritative body. In Canada this is Management is responsible for the decisions made in an done by the Accounting Standards Board of the enterprise. Accounting provides the reports that summa- Canadian Institute of Chartered Accountants, in the rize the economic results of these decisions for inside use United States, by the Standards and transmits them to outside, interested parties (such as Board. See Authoritative standards, Accounting investors, creditors, and regulatory agencies). See Financial policies, Generally accepted accounting principles, and accounting, , and Section 1.1. Section 5.1.

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G-2 GLOSSARY OF TERMS

Accounting Standards Board Accumulated foreign currency translation adjustment The committee of the Canadian Institute of Chartered An account arising as a consequence of the method used Accountants that is responsible for setting financial to convert foreign operations’ accounting figures into accounting standards in Canada. See Section 5.4. Canadian dollars for the purpose of combining them Accounts payable with the figures for Canadian operations. Because accounts are generally converted at Liabilities representing amounts owed to short-term average foreign exchange rates and trade creditors. (An account payable for the debtor is an accounts are generally converted at year-end or histori- account receivable for the creditor.) See Sections 2.3, cal rates, converted accounts do not quite balance. The 2.4, and 9.2. difference is put into equity as a separate item because it Accounts receivable does not seem to fit anywhere else and it is part of the Amounts owing by debtors (customers), usually arising (converted) residual equity of the owners. See Sections 2.9 from sales of goods or services. See Sections 2.3, 3.3, 6.3, and 9.4. 6.4, and 8.6. Acid test ratio Accrual accounting Cash, temporary investments, and accounts receivable The method of making an economically meaningful and divided by current liabilities. Also called the quick ratio. comprehensive measurement of performance and posi- See Ratios and Sections 2.3 and 10.4 (Ratio 19), where tion by recognizing economic events regardless of when the ratio is explained. cash transactions happen, as opposed to the simpler cash basis of accounting. Under this method, Acquisition and (and related assets and liabilities) are There are two related meanings in accounting. The first reflected in the accounts in the period to which they is just a purchase. Buying a new asset is often described relate. See Sections 1.9, 3.1, and 6.2. as an acquisition of that asset, or acquiring it. See Accrual basis Acquisition cost and . The second mean- ing applies to a Business combination in which one The use of accrual accounting in preparing financial company buys enough of the voting shares of another statements. See Section 3.7. company to get voting control and so become the Parent Accrual income of that company, which becomes the acquiring The result of subtracting expenses from revenue(s), company’s Subsidiary. See Section 9.7. (A Merger is when both kinds of accounts are calculated by accrual a business combination in which neither company accounting. See Accrual accounting, , and controls the other. Accounting standards now require Sections 1.9, 3.3, 3.7, 4.1, 6.2, and 6.3. virtually all business combinations to be accounted for as acquisitions.) Accrue To enter amounts in the accounts to reflect events or Acquisition cost estimates that are economically meaningful but that do See Historical cost and Section 8.2. not (at present) involve the exchange of cash. Examples would be recording that is building up on a Adjusted prior to paying it or recording revenue from credit sales The list of accounts prepared after all the accrual prior to receipt of cash from customers. See Sections 1.9, accounting adjustments and corrections have been made 3.1, and 6.2, and Accrual accounting, Revenue recogni- and so representing the final account balances used in tion, and Matching; see also Deferral. preparing the financial statements. See Trial balance, Accrued expense Adjusting (journal) entry, and Sections 3.8 and 3.9. An expense recognized in the accounts prior to paying Adjusting (journal) entry for it. See Section 6.10. A journal entry to implement accrual accounting by Accumulated amortization (depreciation) recognizing in the accounts economic events not yet A balance sheet account that accumulates total amortiza- adequately accounted for by the routine transactional tion (depreciation) expense over a number of years. The accounting system. (For example, if there is no transac- account balance is a credit and so is opposite to the tion to reveal the gradual wear and tear of a fixed asset, debit-balance asset cost account. The difference between an adjusting entry must be made to recognize this cost and accumulated amortization is the “” of depreciation.) See Sections 3.8 and 3.9. the asset. See Book value, Contra accounts, Fixed assets, Amortization and Amortization expense, and Sections 2.1, Adjustment(s) 2.3, and 7.7. See Adjusting (journal) entry and Section 1.7.

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GLOSSARY OF TERMS G-3

Adverse opinion Amortization A type of Auditor’s opinion in which the opinion is that Allocation of the cost of a noncurrent asset to expense the financial statements are not fairly presented. See over several accounting periods to recognize the Section 5.8. “consumption” of the asset’s economic value as it helps to earn revenue over those periods. Amortization expense Agent for a period thus is deducted from revenue in that period, A person who is party to a contract between that recognizing it as a cost of earning the revenue. The term person and another, called the principal. The agent’s amortization, and especially the common term depreciation, role is to carry out the wishes of the principal as speci- is used for the allocation of the cost of tangible assets over fied in the contract. Some examples of agents are time; amortization is also used for the allocation of the managers, auditors, lawyers, and physicians, who are cost of intangible assets such as patents, franchise rights, entrusted with acting on behalf of one or more others and . See Accumulated amortization, Intangible (the principals, such as owners, creditors, defendants, assets, and Sections 1.10, 7.7, 8.10, and 8.12. and patients). Agents have a stewardship responsibility to the principal. See Contract, Principal, Stewardship, Amortization expense and Section 5.11. The expense recorded to recognize asset amortization. See Amortization, Accumulated amortization, and Aggressive accounting Sections 7.7 and 8.10. Seeking out accounting methods and policy choices to meet management objectives for growth, financing, Amortize bonuses, or other purposes that seem to violate princi- To allocate the cost of noncurrent assets (and sometimes ples such as fairness and conservatism. See Section 6.4. liabilities) to expense over several accounting periods. See Amortization, Allocating, and Sections 8.10 and 8.12. Aging of accounts receivable The process of classifying accounts receivable by the Analysis, analyze time that has passed since the account came into exis- The technique, common in accounting, of comparing tence. This classification is used as an aid to estimating information derived from different sources or methods the required allowance for doubtful accounts for the in order to understand what has happened, identify estimated amount of uncollectible accounts receivable. errors, and answer questions about the effects of possible See Section 8.6. actions or events. See Reconciliation and “What if” (effects) analysis. Also used to refer to the detailed study Allocating, allocation of accounting information, such as by using Ratios. See Spreading the impact of an event out over time, as in Sections 1.12 and 10.1–10.9. amortization of an asset’s cost over its useful life or recognition of revenue for a long-term contract over several periods. See Amortization and Sections 6.5 and The document provided annually to the shareholders by 6.10. See also Interperiod tax allocation and Section 9.3, the officers of a company. It includes the financial state- and Intraperiod tax allocation and Section 3.5. ments, the notes to the financial statements, the audi- (Allocation is also used, especially in management tor’s report, supplementary financial information such accounting, to refer to spreading the impact of an event as multi-year summaries, and reports from the across activities, such as in allocating the cost of repairs company’s board of directors and management. See to different departments.) Sections 1.1, 1.3, and 5.6. Allowance for doubtful accounts Articulate, Articulation The estimated amount of accounts receivable that will Of the income statement, retained earnings statement, not be collected (which are “doubtful”). The and balance sheet; refers to the fact that because these allowance, which is a contra account to accounts three statements are prepared from one set of balanced receivable, is used in order to recognize the bad accounts, changes in any one of the three normally expense related to such doubtful accounts but without affect the others. In particular, recognition of revenue removing those accounts from the books because the and expense relies on the fact that a revenue causes a firm will still try to collect the amounts owing. See change in the balance sheet, as does an expense. See Section 7.7. Recognition, , and Sections 3.3, 3.6, 6.3, 6.4, and 8.2. American Institute of Certified Public Accountants (AICPA) Asset(s) The national self-regulating body in the United States An asset is a resource available to do business in the that sets and monitors the auditing and professional future, represented by an ownership of or right to standards by which CPAs practise. expected future economic benefits. Assets have value

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G-4 GLOSSARY OF TERMS

because they are expected to bring benefits as they are what the auditor did and states the Auditor’s opinion. used or sold. See Sections 1.1, 2.3, and 8.2, and Cash See Section 5.8. equivalent assets, Inventory, Accounts receivable, Current assets, Fixed assets, and Intangible assets. Authoritative standards Written rules and guidance established by official Asset valuation accounting standard-setters such as the CICA in Canada Determination of the amounts to be used for assets on and the FASB in the United States. See CICA Handbook the balance sheet. See Balance sheet valuation and and Sections 5.1, 5.4, and 6.4. Section 8.2. Available cost Assumed cost flow The total dollar amount represented by the sum of The practice in inventory accounting of determining the beginning inventory and purchases during the period, cost of inventories purchased at varying unit costs by and thus representing the total dollar cost of inventory assuming a specific order in which the inventory will be available for sale or use during the period. See taken to have flowed into and out of the company. See Sections 8.7 and 8.8. Cost flow assumption and Section 8.7. Assurance Average cost (AVGE) A broader word than “,” encompassing auditing An inventory cost-flow assumption where the cost of an and similar procedures to confirm or verify reports or individual unit of inventory is the weighted average cost events as fair and proper and assure users of such of the beginning inventory and subsequent purchases. reports that they may be relied upon. See Audit, See Weighted average and Section 8.7. Auditor’s report, and Fairness and Section 5.8. Average interest rate AT An average calculated by dividing interest expense by The total assets turnover ratio, defined and explained in total liabilities. Defined and explained in Section 10.4 Section 10.4, Ratio 12. Used in the Scott formula in (Ratio 6). An after-tax version of this is used in the Scott Section 10.6. formula in Section 10.6 (see IN(ATI)).

Audit AVGE The examination of accounting records and their See Average cost and Weighted average. supporting documentation with the objective of deter- mining the fairness with which the financial statements present the financial position and performance of the company. See Auditor, Auditor’s report, and Section 5.8. B Audit committee Bad debts expense A committee of a corporation’s Board of directors, usually composed largely or entirely of directors not An expense account that results from the reduction in also having management positions, which reviews the carrying value of those accounts receivable that have company’s accounting statements and communicates been projected to be uncollectible or doubtful. See directly with the External auditor. See Sections 5.9 Allowance for doubtful accounts and Section 7.7. and 7.3. Balance (an account total) Auditor The net sum of the amounts added to and subtracted The person or firm who performs an audit for the from an account since the account began. In financial purpose of preparing a report on the credibility of the accounting’s double-entry system, the balance is financial statements, also called the External auditor. expressed as a net debit (DR) or net credit (CR). See See Sections 1.4, 1.5, and 5.8. Compare Internal auditor. Account, Double-entry accounting, and Sections 2.4 and 2.5. Auditor’s opinion Balance (in the balance sheet or the trial balance) The portion of the auditor’s report in which the auditor expresses a professional opinion that the financial Refers to the double-entry accounting requirement that statements are, or are not, fairly presented. the sum of the accounts with debit balances and the sum of those with credit balances be equal. In the balance Auditor’s report (or auditors’ report) sheet, this means that the sum of the assets equals the The document accompanying the financial statements sum of the liabilities and equity. See Balance sheet, that expresses the auditor’s opinion on the fairness of Balance sheet equation, Trial balance, and Sections 2.3, the financial statements. The auditor’s report explains 2.7, and 3.9.

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GLOSSARY OF TERMS G-5

Balance sheet by those who received them in return for the original The “balanced” list of assets, liabilities, and owners’ cash provided to the enterprise. See Sections 2.7 and 9.3. equity constituting the formal statement of a company’s Bond markets financial position at a specified date, summarizing by Capital markets in which debt instruments (bonds and category the assets, liabilities, and owners’ equity. See similar items), rather than shares, are traded. See Balance, Balance sheet equation, Balance sheet Capital markets. valuation, Statement of financial position, and Sections 2.2, 2.7, and 2.11. Balance sheet equation The process of recording, classifying, and summarizing transactions in the books of account. See Sections 1.7, The double-entry arithmetic by which Assets = Liabilities 2.2, and 2.4. + Owners’ Equity. See Sections 2.3, 2.4, 8.2, and 8.7. Books Balance sheet valuation Colloquial term for the accounting records, including Assigning numerical values to the balance sheet’s assets, liabilities, and owners’ equity accounts. See Section 8.2. computerized records, left over from the time when the records were written in bound books. See Sections 1.7 Bank overdraft and 7.2. A negative bank account balance (withdrawals exceeding Books of original entry deposits), which banks may allow as a de facto as long as it is temporary. See Line of credit and Sections 2.7 The journals in which transactions are first recorded. and 4.3. See Section 7.2. Book value An analysis conducted to determine if the bank account The amount shown in the accounts for any individual balance according to the accounting records corre- asset, liability, or owners’ equity item after deducting any sponds with the balance as reported by the bank. The related contra account (for example, the book value of a two balances seldom agree exactly, so the reconciliation truck is the recorded cost minus accumulated amortiza- is designed to set out the reasons for any disagreement. tion). The term is also commonly used for the whole See Analysis and Sections 1.12 and 7.5. enterprise, to refer to the net amount of total assets less total liabilities (the recorded value of the owners’ resid- Bankruptcy ual interest, which equals total equity: Assets = Liabilities The usually involuntary termination of an enterprise due + Equity). See Sections 7.7 and 8.11 for the book value of to its inability to pay its debts and continue in operation. individual assets and Sections 2.3, 9.4, and 9.7 for the Bankruptcy usually involves significant losses to both book value of the whole enterprise. See also Book value creditors and owners. See Going concern. per share. Betterment Book value per share An expenditure to improve an asset’s value to the business, Total shareholders’ equity divided by the number of more than just repairs and maintenance. See Section 8.4. shares issued. It is defined and explained in Section 10.4, Ratio 9. Big Bath A way of manipulating reported income to show even Bottom line poorer results in a poor year in order to enhance later A colloquialism referring to the net income (the “bottom years’ results. See Sections 3.10 and 6.4. line” on the income statement). See Net income. Board of directors Business combination The senior level of management, representing and A merger of separate corporations or an acquisition of directly responsible to the owners (shareholders). control of one corporation by another, in which the Normally elected annually by the shareholders, the corporations become a single economic entity. See board is responsible for hiring and supervising the Accounting entity, Consolidation, and Section 9.7. operating management (president, chief executive offi- cer, etc.). See Sections 2.3, 3.3, and 5.3. Bond, bonded debt C A certificate of debt issued by an enterprise in return for cash, in which a promise is made to repay the debt CA (usually at a particular date or on a specified schedule) Chartered accountant. See Canadian Institute of plus interest. Many bonds may be sold to other people Chartered Accountants. See Sections 5.8 and 5.9.

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G-6 GLOSSARY OF TERMS

Callable debt Capital markets Debt, such as bonds, that might have to be repaid ahead Markets in which financial instruments such as shares of schedule at the option of the creditor. Most bank and bonds are traded. See Sections 3.2 and 5.10, are callable, in that the bank can ask for repay- Financial instruments, and Stock exchange. ment within a few days even if the original repayment plan extended over a longer period. See Section 9.2. Cash Currency and coin on hand, balances in bank accounts, Canada Business Corporations Act (CBCA) and other highly liquid assets. See Cash and equivalents The federal corporations act that provides the authority and Sections 4.3, 7.5, and 8.5. for the incorporation of federally incorporated compa- nies in Canada and generally sets the requirements for Cash and equivalents their activities. It requires any such company to prepare Cash and near-cash assets minus near-cash liabilities: annual financial statements. cash equivalent assets minus cash equivalent liabilities. Changes in cash and equivalents are explained by the Canadian Certified General Accountants Association (SCFP). See Cash flow statement, (CGA-Canada) Cash, and Sections 4.3 and 8.5. An association whose members (CGAs) have had train- ing in accounting, taxation, auditing, and other areas of Cash disbursements business and have passed qualifying exams. CGA-Canada Cash payouts, by cheque, currency, or direct deductions and provincial associations of CGAs set and monitor from the bank account. See Cash payments, Cash standards by which CGAs practise. CGA-Canada is one of disbursements journal, Cash receipts, Cash income, and the three national professional accounting bodies. See Section 4.4. Accountant and Sections 1.5, 5.8, and 5.9. Cash disbursements journal Canadian Institute of Chartered Accountants (CICA) The record of cheques and other cash payments made. A national, self-regulating association of chartered See Books of original entry and Section 7.2. accountants in which the accountants have met educa- tion and examination standards in Canada. The CICA Cash equivalent assets and provincial institutes of CAs set and monitor the stan- A term used to describe cash plus very liquid bank dards by which CAs practise. One of the three national deposits and similar assets that can be converted into professional accounting bodies. See Accountant and cash on demand. See Sections 4.3 and 8.5. Sections 1.5, 5.8, and 5.9. Cash equivalent liabilities Capital Liabilities that are payable on demand and so represent The owner’s contribution to or interest in a business a reduction in the liquidity otherwise apparent from (the equity). Often used specifically to refer to the equity the amount of cash. Under current accounting stan- of unincorporated businesses (proprietorships and dards, temporary bank overdrafts are the only common partnerships). See Equity and Sections 2.9 and 9.4. cash equivalent liabilities. See Bank overdraft and Capital cost allowance Section 4.3. The Canadian Income Tax Act’s version of amortization Cash flow (depreciation), used in calculating taxable income for The inflows of cash (cash receipts) and outflows of cash assessment of income tax. See Section 9.3. (cash disbursements) over a period. Information about Capitalization, capitalize cash flow is presented in the Cash flow statement. See also Sections 4.2 and 4.3. The recognition of an expenditure that may benefit a future period as an asset rather than as an expense of the Cash flow analysis period of its occurrence. Expenditures are capitalized if A method of accounting Analysis directed at understand- they are likely to lead to future benefits, and, thus, meet ing the enterprise’s cash inflows, outflows, and resulting the criterion to be an asset. See Sections 3.8 and 8.4. balances. This analysis lies behind the Cash flow Capitalized costs statement. See Section 4.2. Costs that have been included with an asset on the Cash flow statement balance sheet instead of being deducted as expenses on the income statement. See Sections 7.7, 8.4, and 8.14. A statement that explains the changes in cash (and equivalent) balances during a fiscal period. Also referred Capital lease to as “Statement of changes in financial position A lease having the economic character of asset (SCFP),” “Funds statement,” or “Statement of cash ownership. See Sections 8.14 and 9.3. flows.” See Direct method of cash flow analysis, Indirect

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GLOSSARY OF TERMS G-7

method of cash flow analysis, and Sections 1.1, 4.2, 4.3, Change in cash and 10.5. Demonstrating why cash changed as it did is the objec- tive of the Cash flow statement’s analysis. Cash income is Cash flow to total assets part of this change. See Sections 1.10 and 4.3–4.5. The ratio of cash from operations divided by total assets. It is defined and explained in Section 10.4, Ratio 7. See Chart of accounts Cash from operations. An organized list of the accounts used in the accounting system. This can be contrasted with the “trial balance,” Cash from operations which displays all the accounts and their debit or credit Cash generated by day-to-day business activities and balances. See Section 7.2. highlighted as the first section in the Cash flow statement. See Sections 4.2, 4.3, 4.9, and 10.5. Cheque A request by one party that the party’s bank pay a Cash income specified amount to another party. See Section 7.2. Cash receipts minus cash disbursements, or that subset of both that relates to day-to-day operations. The operat- CICA Handbook ing subset is roughly equivalent to the Cash flow state- The authoritative source of financial accounting ment’s Cash from operations figure. See Cash receipts, standards in Canada. See Section 5.4. Cash disbursements, Direct method of cash flow Classification analysis, and Sections 1.10 and 4.4. Choice of where in the financial statements to place an Cash payments account, such as whether an investment asset should be Payments by currency, cheque, or other bank with- shown as a current asset or a noncurrent asset. See drawal. See Cash transaction, Cash disbursements Sections 2.7, 3.5, and 3.8. journal, and Section 4.4. Classification policies Cash receipts Accounting policies covering where within a financial Cash inflows, by currency, others’ cheques, or direct statement an account or description is to appear. See bank deposits. See Cash transaction, Cash receipts Sections 2.7, 3.5, 3.8, and 6.4 and Accounting policies. journal, and Section 4.4. Classified financial statements Cash receipts journal with accounts organized under headings that clarify the accounts’ meaning, done to The record of customers’ cheques and other cash received. See Books of original entry and Section 7.2. increase the information value of the statements. See Sections 2.3, 2.7, 3.5, and 4.3. Cash received basis Clean opinion Recognition of revenue only when the cash comes in. An external auditor’s report which states the auditor’s See Revenue recognition, Conservatism, and Section 6.7. opinion that the financial statements are fairly Cash transaction presented. This is the kind of auditor’s report that most companies receive because it indicates the auditor found The simplest kind of economic exchange routinely no problems. See Auditor’s report, Qualified opinion, recorded by financial accounting, and an important and Section 5.8. starting point for the financial statements. See Sections 1.7 and 4.4. Close, closing Transfer(ring) the temporary accounts (revenues, CCA expenses, and dividends declared) to retained earnings See Capital cost allowance. at the end of the fiscal period. See Closing entry and CGA Sections 3.6 and 3.7. Certified general accountant. See Canadian Certified Closing entry or entries General Accountants Association (CGA-Canada) and Journal entries recorded at year-end to transfer the Sections 5.8 and 5.9. balances in temporary accounts (revenues, expenses, Change effects analysis and dividends) to the balance sheet account retained Analysis of the effects on financial statements of economic earnings and set those balances to zero in preparation or accounting policy changes. See Sections 1.12 and 10.8 for entering the next year’s transactions. See and “What if” (effects) analysis. Sections 3.6–3.8.

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G-8 GLOSSARY OF TERMS

CMA principal and so attracts future interest itself. Annual Certified management accountant. See Society of compounding, for example, means that interest built Management Accountants of Canada and Sections 5.8 up on a loan starts to bear interest itself on each annual and 5.9. anniversary of the loan. See Present value and Section 10.7. COGS See and Sections 7.9 and 8.7. Conditional sale contract A form of borrowing whereby the title to an asset COGS expense purchased on credit does not pass to the buyer until all See Cost of goods sold expense and Sections 7.9 and 8.7. the payments, usually plus interest, are made. See Section 9.3. Collection ratio The ratio of accounts receivable to the daily sales, Conservatism, conservative expressed in number of days’ sales represented by A prudent reaction to uncertainty to ensure that risks accounts receivable. Also called Days’ sales in inherent in business situations are adequately consid- receivables. It is defined and explained in Section 10.4, ered—often phrased as “anticipate possible losses but Ratio 14. not possible gains.” In situations where the accountant Common shares cannot decide on the superiority of one of two accounting treatments on the basis of accounting prin- The basic voting ownership in a corporation. ciples alone, being conservative means choosing the See Corporation and Sections 2.9 and 9.4. treatment that has the least favourable impact on the Common size financial statements income of the current period. See Historical cost, Cash received basis, Completed contract method, and A technique of analyzing financial statements in which Lower of cost or market for examples of conservatism, income statement figures are expressed in percentages and see also Sections 5.2, 5.3, 6.4, 6.7, and 8.2. of revenue and balance sheet accounts are expressed in percentages of total asset. It is defined and explained in Consistency Section 10.4, Ratio 4. Treatment of like transactions in the same way in consec- Company utive periods so that financial statements will be compa- See Corporation. rable. The reporting policy implying that procedures, once adopted, should be followed from period to period Comparability by a company. See Accounting policies and Sections 5.2, Information that enables users to identify similarities 5.3, and 6.4. in and differences between two sets of economic phenomena, such as two different years of a company’s Consolidated financial statements, consolidation financial statements. Comparability between compa- Consolidation is a method of preparing financial state- nies and consistency of one company over time are ments for a group of corporations linked by ownership major objectives of financial accounting. See Fairness, as if they were a single corporation. Consolidated finan- Consistency, and Sections 5.2, 5.3, and 6.4. cial statements recognize that the separate legal entities are components of one economic unit. They are distin- Compilation guishable from the separate parent and subsidiary A service performed by accountants practising public corporations’ statements, and from combined state- accounting, whereby they prepare financial statements ments of affiliated corporations. See Pooling of interests for enterprises without taking responsibility for the method, Purchase method, and Sections 1.1, 2.9, 9.6, quality of the accounting information used to prepare and 9.7. them and without auditing them. See Section 5.8. Consolidated goodwill Completed contract A form of Goodwill arising only when companies’ finan- A method of revenue recognition for long-term cial statements are combined in Purchase method contracts in which the revenue is not reported on the consolidation. See Sections 2.9 and 9.7. income statement until the contract has been completed. See Revenue recognition, Conservatism, and Contingency, contingent asset, contingent liability Section 6.7. An economic event (especially a negative one) that is in the process of occurring and so is not yet resolved. Compound, compounded, compounding Contingencies would include but are not limited to These refer to the frequency with which interest calcu- pending or threatened litigation, threat of expropriation lated on a loan or other debt is periodically added to the of assets, guarantees of the indebtedness of others, and

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GLOSSARY OF TERMS G-9

possible liabilities arising from discounted bills of the assets of owners. See Partnership, Proprietorship, exchange or promissory notes. See Conservatism and and Sections 1.4, 2.9, 3.2, and 9.4. Section 9.3. Cost Contra accounts The value of an asset when it is acquired by the business. Accounts established to accumulate certain deductions See Historical cost and Sections 1.7, 8.2, and 8.4. from an asset, liability, or owners’ equity item. See Book value, Amortization, Depreciation, Allowance for Cost allocation doubtful accounts, and Sections 7.7 and 9.3. Spreading the cost of an asset out over the periods in which it is useful. See Allocating, Amortization, and Sections 8.8 Contract and 8.9. (Cost allocation is also used in managerial A contract is an oral or written agreement between or accounting to refer to spreading the cost of an activity out among parties, setting out each party’s responsibilities across various products or services affected by that activity.) and specifying actions agreed to and resulting payments or other settlements. See Agent and Principal regarding Cost basis one type of contract important in accounting, and Usually used to account for a noncurrent intercorporate Section 5.11. investment when a corporation owns less than 20% of Contributed surplus another corporation. The investment is carried at cost, and any receipt of dividends or interest is recorded as The difference between the legal Par value (or Stated “other income.” See Equity basis, Intercorporate value) of a share and the cash or other consideration investments, and Section 9.6. received by the company when the share was issued. Also referred to with terms like “capital in excess of par Cost-benefit value.” Does not apply to No-par shares, which are the The idea of comparing the benefits of a particular action usual kind in Canada. See Sections 2.9, 2.10, and 9.4. with its costs, and taking action only if the benefits Control account exceed the costs. See Sections 1.5 and 5.2. An account used to contain the aggregate amounts of Cost flow assumption many detailed transactions and so help to prevent or An assumption made about the order in which units of detect errors in the detailed records. The accounts receiv- inventory move into and out of an enterprise, used to able control account, for example, should have the same compute inventory asset value and cost of goods sold total as the sum of all the individual customers’ accounts expense in cases where the order of flow is not or cannot receivable. Control accounts with detailed backup include be identified. Possible assumptions include FIFO, LIFO, cash, accounts receivable, inventory, accumulated amorti- and weighted average. See Cost of goods sold, FIFO, zation, accounts payable, sales tax due, employee deduc- AVGE, Weighted average, and LIFO for specific tions due, and share capital. See Internal control, examples. See also Section 8.7. Accounting control, and Sections 7.2, 7.6, and 7.7. Cost of capital Convertible A bond or share that can be changed into another kind The cost of raising debt or equity funds (e.g., the cost of of Security, usually a Preferred share that can be borrowed funds is mostly the interest to be paid to the converted into a Common share. See Section 9.5. lender). See Section 10.7. Corporate governance Cost of goods sold (COGS) expense The arrangements by which the board of directors and An expense account that reflects the cost of goods that top management operate the corporation on behalf of generated the revenue (also called cost of sales). The its shareholders. See Section 7.3. method of calculating COGS depends on the method of inventory costing. See Cost flow assumption, Inventory Corporate group costing, and Sections 3.3, 3.4, 7.9, and 8.7. A group of corporations linked by common or mutual Cost principle ownership. See Consolidation and Sections 2.8, 9.6, and 9.7. The use of the historical cost of assets to value them on Corporation the balance sheet. See Historical cost, Balance sheet A legal entity with or without share capital, legally sepa- valuation, and Sections 5.2 and 8.2. rate from those who own it or work as a part of it. It enjoys most of the rights and responsibilities of a person CPA except for those that only an actual person can enjoy. Its Certified public accountant (a designation used espe- main feature is limited liability; in other words, only the cially in the United States). See American Institute of assets of the company can be claimed by creditors, not Certified Public Accountants and Sections 5.8 and 5.9.

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G-10 GLOSSARY OF TERMS

Credit (CR or Cr) Current or market value The right-hand side of double-entry accounting. The The estimated sale value of an asset, settlement value of a term credit can be used as a noun to refer to the right- debt, or trading value of an equity share. See Sections 8.2, hand side of a journal entry or account, or as a verb 8.5, and 8.9. referring to the action of making an entry to the right- Current portion of income tax expense hand side of an account. Most accounts on the right- The part of the year’s income tax expense that has been hand side of the balance sheets have credit balances (in paid or is due to be paid within the next year. The rest of other words, the credits to them exceed the debits to the income tax expense is the Future portion of income them). The term credit also refers to the right to buy or tax expense. See Section 9.3. borrow on the promise of future payment. A credit journal entry to the liabilities and equity side of the Current ratio balance sheet causes an increase in the account, while a Also called Working capital ratio, equalling current assets credit to the assets side of the balance sheet causes a divided by current liabilities. It is defined and explained decrease. See Double-entry accounting, Debit, and in Section 10.4, Ratio 18. See also Section 2.3. Sections 2.4–2.6. Current value accounting Creditor A proposed accounting method that would use current One who extends credit (that is, gives someone the right or market values to value assets and liabilities and to to buy or borrow now in consideration of a promise to calculate income. See Sections 2.9 and 8.2. pay at a later date). See Sections 1.5 and 2.3. Cut off Credit transaction The end of a fiscal period and the procedures used to An economic exchange in which at least one party ensure accuracy in measuring phenomena up to that makes a promise to pay cash or other consideration date. See Section 6.5. later. This kind of transaction is recognized by most financial accounting systems, especially if it is a routine way of doing business. See Accounts receivable, Accounts D payable, and Section 1.7. Days’ sales in receivables Critical event The ratio of accounts receivable to the daily sales, A point in the revenue generation and collection process expressed in number of days’ sales represented by chosen to represent the earning of the revenue, and so accounts receivable. Also called Collection ratio. Defined the point at which the revenue is recognized in the and explained in Section 10.4, Ratio 14. accounts. This is a simplification: a common critical event DCF is the point at which the customer takes delivery of the goods sold. Not all revenue is accounted for this way: See Discounted cash flows, another phrase for “present some is allocated over more than one point in the value” analysis of future cash flows. See Present value process: long-term construction projects and franchise and Section 10.7. revenue are examples where the critical event simplifica- Debenture tion is generally not used. See Revenue recognition and A form of Security taken by a creditor on a loan or bond, Section 6.6. in which the creditor has a general ability to influence or Current assets direct management decisions if the debt payments are not made on schedule; not a claim on a specific asset as Cash and other assets such as temporary investments, a Mortgage has. See Sections 2.7 and 9.3. inventory, receivables, and current prepayments that are realizable or will be consumed within the normal operat- Debit (DR or Dr) ing cycle of an enterprise (usually one year). See such The left-hand side of double-entry accounting. The term current asset categories as Cash equivalent assets, debit can be used as a noun to refer to the left-hand side Inventory, and Accounts receivable. See also Sections 2.3, of a journal entry or account or as a verb referring to the 2.10, 2.11, and 8.2. action of making an entry on the left-hand side of an account. Most accounts (except contra accounts) on the Current liabilities left-hand side of the balance sheet have debit balances, Debts or estimated claims on the resources of a firm that which means the debits to them exceed the credits to are expected to be paid within the normal operating them. A debit will increase the amounts on the asset side cycle of an enterprise (usually one year). See Cash equiv- of the balance sheet, but decrease the amounts on the alent liabilities, Accounts payable, and Sections 2.3, 2.10, liabilities and equity side. See Double-entry accounting, and 9.2. Credit, and Sections 2.4–2.6.

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GLOSSARY OF TERMS G-11

Debt Deferred income tax (expense and liability) An obligation to make a future payment in return for a An expense account and corresponding liability benefit already received. See Sections 2.3, 9.2, and 9.3. intended to recognize the future tax consequences of income reported on the current income statement but Debt-equity ratio not to be reported on the tax return until a future Total liabilities divided by total equity. It is defined and period. Now largely replaced by future income tax liabil- explained in Section 10.4, Ratio 15. See also Section 2.3, ity estimates. See Future income tax and Section 9.3. and used in the Scott formula in Section 10.6. Deferred revenue Debt to assets ratio A liability account used for customer deposits or other Total liabilities divided by total assets. It is defined and cash receipts prior to the completion of the sale (for explained in Section 10.4, Ratio 17. example, before delivery). See Section 9.3. Deficit Decelerated amortization Negative retained earnings, and sometimes also used The opposite of accelerated amortization or deprecia- to refer to negative earnings. See Retained earnings, tion. Not acceptable for most enterprises. See Net loss, and Sections 2.3 and 3.3. Accelerated amortization and Section 8.12. Delivery Decision relevance The most common basis of recognizing revenue. An accounting objective: information should be available Revenue is said to be earned when the product or serv- to the user at a time and in a form that is useful to the ice has been delivered to the customer. See Revenue user’s decision making. See Relevance and Sections 5.2, recognition and Sections 6.6 and 6.7. 5.3, and 6.6. Demand loans Declining balance amortization Loans that are repayable whenever the creditor wants. An accelerated amortization (depreciation) method in These are a form of Callable debt. See Section 9.2. which the annual amortization (depreciation) expense is Denial of opinion calculated as a fixed percentage of the book value of the asset, which declines over time as amortization is A form of Auditor’s opinion in which the auditor reports deducted. See Accelerated amortization, Amortization, that no opinion may be given about the financial and Section 8.12. statements’ fairness. See Section 5.8. Depletion Deferral An amortization (depreciation) method used for physically Part of accrual accounting but often used as the oppo- wasting assets such as natural resources. See Section 8.10. site to an accrual. A deferral involves keeping a past cash receipt or payment on the balance sheet—in other Depreciation words, putting it on the income statement as revenue The recognition of the expense due to use of the or expense at a later time. An example is recognizing economic value of fixed tangible assets (for example, a deferred revenue liability resulting from a recent trucks, building, or plant). Usage, at least in Canada, cash receipt, such as for a magazine subscription to be appears to be changing to replace the term depreciation delivered later. (In contrast, accruals involve record- with the more general term amortization. See ing a revenue or expense before the cash receipt or Amortization, Declining balance amortization, Straight- payment occurs.) See Sections 6.2 and 6.3. line amortization, Book value, and Accumulated amorti- zation (depreciation). See also Sections 1.10, 7.7, 8.10, Deferral method and 8.12. A way of accounting for future income tax expenses incurred by present activities, now largely replaced by Diminishing balance future income tax liability estimates. See Deferred Another name for Declining balance amortization. See income tax. Section 8.12. Deferred charge Direct method of cash flow analysis A noncurrent Prepaid expense, in which the costs of A method of preparing the Cash flow statement, espe- issuing bonds, incorporation costs, or other expendi- cially the Cash from operations section, using records of tures benefiting several future periods are shown as cash receipts and disbursements instead of the adjust- noncurrent assets and usually amortized to expense over ments to net income used in the more traditional several periods or otherwise charged to expenses in Indirect method of cash flow analysis. See Sections 4.3 some future period. See Sections 2.10 and 8.14. and 4.4.

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G-12 GLOSSARY OF TERMS

Direct write-off the income statement. See Statement of retained earn- Transferring the cost of an asset to an expense or Loss ings, Stock dividend, and Sections 2.3, 3.3, 3.4, and 9.4. account by removing the amount entirely from the asset Double declining balance account. Used in cases where there is no prior allowance for the expense or loss, so used when there is no Contra See Declining balance amortization, Accelerated amorti- account such as Accumulated amortization or Allowance zation, Amortization and Section 8.12. for doubtful accounts. See Section 7.7. Double-entry accounting Disbursements The practice of recording two aspects of each transac- See Cash disbursements and Section 4.3. tion or event: the resource effect and the source or story of that effect. Though much expanded since its inven- Disclosure tion several hundred years ago, it is still the basis of Provision of information about economic events beyond bookkeeping and financial accounting. See Sections 2.2 that included in the financial statement figures. Usually and 2.3. given in the notes to the financial statements, but also provided outside the financial statements in press Double-entry bookkeeping releases, speeches, and other announcements. See Notes See Double-entry accounting. to the financial statements, Management of corporate financial disclosure, and Sections 1.10, 4.7, 5.2, 5.3, and 6.4. E

Discontinued operations Earnings Portions of the business that the enterprise has decided A common synonym for net income. See Net income not to keep going and/or to sell to others. It is good and Sections 2.3 and 3.3. practice to separate the effects of discontinued opera- tions from continuing operations when measuring income and cash flow. See Section 3.5. Choosing accounting methods and/or making business Discount (on bonds) deals with the specific objective of altering the size, Arises when bonds are issued at a price below their legal trend, or interpretation of the company’s earnings (net face value, such as a $100 bond being issued for $95 income). Usually frowned on as a form of Manipulation cash, indicating a $5 discount. See Section 9.3. of accounting information. See Sections 3.10, 6.5, and 9.5. Discounted cash flows Earnings per share (EPS) “Present value” analysis of future cash flows by removing their presumed interest components. See Present value The ratio of net income to the average number of and Section 10.7. common (voting) shares outstanding, used to allow the owner of the shares to relate the corporation’s earning Discretionary expenses power to the size of his or her investment. The calcula- Expenses that depend on management’s discretion tion of EPS can be quite complex, so most public compa- rather than on the necessities of producing, selling, or nies calculate it for the users (as required by generally shipping goods and services. Examples might be dona- accepted accounting principles for such corporations) tions, political contributions, some maintenance and and report it on their income statements. See Ratios, warranty costs, and bonuses not specifically called for in Section 3.4, and Section 10.4, Ratio 8, where EPS is employment contracts. See Section 6.6. defined and explained. DIT Earnings-price ratio See Deferred income tax. The inverse of the Price-earnings ratio. Earnings per Dividend payout ratio share divided by the market price of one share of a The ratio of dividends declared to net income. It is corporation. See PE ratio, Ratios, and Section 10.4, defined and explained in Section 10.4, Ratio 11. Ratio 10, where the ratio is defined and explained. Dividends EBITDA Distributions of a portion of net income to shareholders Earnings before interest, tax, depreciation and amortiza- in the company. Since this type of payment does not tion. A more positive measure of net income for a relate to the operating performance of the company, it is company because it includes all revenues but not all placed on the statement of retained earnings and not expenses. See Section 3.10.

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GLOSSARY OF TERMS G-13

E-commerce the employee. Such deductions include income tax, See Electronic commerce and Sections 1.7 and 7.2. pension contributions, union dues, and many other amounts the employee wants to or has to pay before Economic entity receiving the net pay that is left over. See Section 7.6. The financial accounting definition of an enterprise, Entity used to determine what is to be included in transactions and in the financial statements. Also used to refer to a See Accounting entity and Economic entity. group of companies considered to be under the same Entry control and, so, constituting a larger economic group. See Journal entry and Sections 2.4, 2.6, and 3.6. See Accounting entity, Transaction, Consolidation, and Sections 2.9, 3.2, 5.2, and 9.7. EPS Effective income tax rate See Earnings per share and Section 10.4, Ratio 8. The income tax rate the company appears to incur, as Equities deduced from the financial statements. Differs from the A term sometimes used to refer to the right-hand side of statutory or legal rate because of many possible tax the balance sheet (Equities = Liabilities + Owners’ incentives, varying rates across jurisdictions, etc. Can be equity). estimated as the company’s income tax expense divided by income before income tax, both from the income Equity statement. See Section 9.3. The net assets or residual interest of an owner or share- holder (Assets = Liabilities + Equity, or restated as Equity Effects analysis = Assets – Liabilities). See Balance sheet equation and See “What if” (effects) analysis and Sections 1.12 the components of equity under Shareholders’ equity, and 10.8. Retained earnings, and Sections 2.3, 2.9, and 9.4. Efficiency (of information use, or informational Equity basis efficiency) A method of accounting for intercorporate investments Refers to a market’s prices quickly and appropriately usually used when a company owns between 20% and changing to reflect new information. See Section 5.10. 50% of another company. The investment is carried at cost, and any or loss, multiplied by the percentage Efficient capital market ownership of the owned company, is added to or A theoretical description of a capital market whose deducted from the investment. Any dividends received prices respond quickly and appropriately to information. are deducted from the investment. See Cost basis and See Section 5.10. Section 9.6.

Efficient market hypothesis Exchange The proposal that capital markets actually are “efficient,” A transfer of goods, services, or money between two responding quickly, smoothly, and appropriately to infor- parties. In financial accounting, the most significant mation. Some seem to be efficient, and some do not. See kind of exchange is external—that is, between the enter- Efficient capital market and Section 5.10. prise and parties it deals with, such as customers, suppli- ers, owners, employees, and creditors. See Transaction Electronic commerce and Sections 1.7 and 2.4. Also called e-commerce, this is the conducting of finan- Expenditure cial transactions, and many of the business transactions behind them, over electronic media such as telecommu- The term can mean any Cash payment, but usually nication lines or the Web. See Section 7.2. spending on noncurrent assets or debts is meant. Also used instead of the word Expense for governments and Electronic funds transfer (EFT) other nonbusiness organizations that may not use full Transfer of money between a buyer’s bank account and accrual accounting and therefore do not have expenses the seller’s bank account without need to write cheques as accountants usually mean them. See Sections 3.3 or make deposits. EFT is what is happening if a customer and 5.5. uses a bank card to pay for groceries in the supermarket Expense and the amount is automatically deducted from the customer’s bank account. See Section 7.2. The cost of assets used and/or obligations created in generating revenue, whether or not paid for in cash in Employee deductions the period they appear on the Income statement. See Amounts an employer is required to deduct from an Revenue, Matching, Expense recognition, Accrual employee’s pay and remit to someone else on behalf of accounting, and Sections 1.10, 3.3, 3.4, 6.3, and 6.8.

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G-14 GLOSSARY OF TERMS

Expense recognition Incorporating measures of expenses incurred into the An estimate of the fair market values of assets and liabili- measurement of income by entering into the accounts ties of an acquired company used in the purchase the amount of expense determined, according to the method of consolidation accounting. See Sections 8.2 firm’s accounting policies, to be attributable to the and 9.7. current period. See Matching, Revenue recognition, and Fair value accounting Sections 6.3 and 6.8. Valuing assets on the balance sheet at their estimated Expensing value to the company, such as if sold in a fair transaction. Classifying an expenditure or promised expenditure Fair value accounting would use these values instead of (accrual) as an expense rather than an asset. Opposite of Historical cost amounts on the balance sheet. See Fair Capitalization. See Section 8.4. market value and Fair value, and Section 6.3. External audit The audit conducted by an External auditor. See FASB Section 5.8. See Financial Accounting Standards Board and External auditor Section 5.4. An independent outside auditor appointed to review the FIFO financial statements. See Auditor and Sections 1.5, 5.1, An inventory cost flow assumption by which cost of 5.2 and 5.8. goods sold is determined from the cost of the beginning inventory and the cost of the oldest purchases since; thus Extraordinary items the acronym FIFO, which stands for “first in, first out.” It Gains and losses that arise out of situations that are not follows therefore that under FIFO, ending inventory cost normal to the operations of a firm, not under the is determined from the cost of the most recent control of management, and not expected to recur purchases. Since the older inventory is assumed to be regularly in the future. See Section 3.5. sold first, FIFO in a period of inflation usually creates a smaller cost of goods sold and higher income and ending inventory asset value than LIFO or Weighted F average. See Cost flow assumption, Cost of goods sold, and Section 8.7. Fair market value Financial accounting A value or price determined by an unrelated buyer and seller who are separate and acting rationally in their own The reporting in Financial statements of the financial self-interest. The value is considered more meaningful if position and performance of a firm to users external to established in an actual transaction than if estimated the firm on a regular, periodic basis. See Management hypothetically. Historical cost is assumed to have been accounting and Section 1.3. the fair market value of an asset when it was acquired. Financial Accounting Standards Board (FASB) See forms of estimated fair market value under Fair A U.S. body responsible for setting the standards that value accounting, Net realizable value and Replacement financial reporting must follow. The Canadian counter- cost, and Sections 8.2 and 9.7. part is the Canadian Institute of Chartered Accountants. Fairness See CICA Handbook and Section 5.4. Because of all the estimations, judgments, and policy Financial assets choices that go into preparing financial statements, there Near-cash assets such as traded shares, bonds, some is no one correct set of figures or disclosures. Instead, kinds of loans, and accounts receivable, especially as there is the idea of fairness, which means playing by the would be held by financial institutions such as banks. rules and preparing statements honestly, without any Part of the general category of Financial instruments. intent to deceive or to present any particular view. The See Section 8.2. opinion paragraph of the auditor’s report states that the financial statements “present fairly ... in accordance with Financial instruments generally accepted accounting principles.” Attention to Debts, shares, foreign exchange contracts, and other fairness in the application of accounting principles financial obligations and assets, many of which are requires care and judgment in distinguishing the traded on Stock markets and other Capital markets. See substance from the form of a transaction and identifying Sections 2.9, 5.10, and 9.5. the accepted principles and practices. See Generally accepted accounting principles, Accounting standards, Financial leverage and Sections 5.2, 5.3, and 6.4. See Leverage and Section 10.6.

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GLOSSARY OF TERMS G-15

Financial performance Fiscal period The enterprise’s ability to generate new resources from The period (usually a year, a quarter, or a month) over day-to-day operations over a period of time, via dealing which performance (net income) is measured and at the with customers, employees, and suppliers. Measured by end of which position (balance sheet) is determined. the Net income figure in the Income statement and the See Section 6.5. Cash from operations figure in the Cash flow statement, Fixed assets as well as by the details of both statements. See Sections 1.3 and 3.3. Tangible, noncurrent, physical assets that are not expected to be used up in one operating cycle, but are Financial position expected to be used in generating revenue for many The enterprise’s set of assets, liabilities, and owners’ periods (for example, machines, buildings, land). See equity at a point in time. Measured by the Balance sheet, Noncurrent assets and Section 8.10. also called the Statement of financial position. See Foreign currency translation, foreign currency Sections 1.3 and 2.3. translation adjustment Financial reporting The conversion of foreign monies into domestic monies Use of Financial statements and Disclosure to report to at a specific date—either a transaction date, if translating people outside the enterprise on its Financial perform- a single transaction, or a financial statement date, if ance and Financial position. See Section 5.6. translating a foreign operation for consolidation purposes. This process normally produces an adjustment Financial statement analysis to make the accounts balance, shown in the equity Use of the financial statements to develop summary section of the balance sheet. See Accumulated foreign measures (ratios) and interpretive comments about an currency translation adjustment and Sections 2.9 enterprise’s financial performance and position. See and 2.10. Ratios and Sections 10.3 and 10.4. Form versus substance Financial statements A potential choice or conflict among accounting meth- The reports, for people external to the enterprise but ods in which one possibility (“form”) fits the accounting also of interest to management, referred to in the defini- rules better and another possibility (”substance”) reports tion of Accounting, which generally comprise a Balance the business and economic reality better. See Sections 5.2 sheet, Income statement, Statement of retained and 5.3. earnings, Cash flow statement, and the Notes to these statements. See each of these statements in this glossary Franchising and Sections 1.3 and 5.6. A franchisor sells to a franchisee the right to use the franchisor’s name, products, or other economic goods. Financing See Section 6.8. The combination of Debt and Equity that accounts for the company’s assets. See Section 2.3. See also Balance sheet equation. Sometimes there is also Off-balance- A kind of accounting used by governments and other sheet financing. nonbusiness organizations to segregate groups of assets, liabilities, some forms of equity, revenues, and expendi- Financing activities tures, in accordance with the purpose for which the The category of the Cash flow statement that describes funds were obtained. For example, donations received the cash obtained or used in connection with might be segregated from research grants received so noncurrent debt and equity. See Section 4.3. that each kind of money is put to the use intended when it was obtained. See comments at the end of Section 9.4. First-in, first-out See FIFO and Section 8.7. Funds statement See Cash flow statement and Section 4.2. Fiscal Refers to the finances of an entity, and so is used to Future income tax, future portion of income tax designate the period covered by the financial statements, expense which may not accord with regular calendar periods. For Income tax expected to be paid in future years based on example, some companies use a 52-week “fiscal year” in business events and income tax calculations done up to some years and 53 weeks in others, and such a Fiscal the present. The liability and associated expense are period may end at any time of the calendar year the calculated by the Liability method, which estimates the company has chosen. See Section 2.10. likely future tax payments directly, and which has

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G-16 GLOSSARY OF TERMS

recently replaced the Deferral method and Deferred income tax. See Section 9.3. A collection of individual accounts that summarizes the Future income tax liability entire financial accounting system of an enterprise. See Sections 2.5, 3.8, and 7.2. Estimated income taxes due in the future, based on accounting income and income tax calculations done up Generally accepted accounting principles (GAAP) to the present. The liability results from Future income Principles and methods of accounting that have the tax accounting. This liability is usually noncurrent. general support of standard-setting bodies, general prac- (Future income tax assets also can arise from future tice, texts, and other sources. See Accounting standards income tax accounting.) See Section 9.3. and Sections 1.1, 5.1, and 5.3. Future value (FV) Generally accepted auditing standards (GAAS) The amount to which presently held financial assets or The professional standards of care and evidence compi- liabilities will build up as interest is added to the princi- lation that external auditors are expected to follow when pal amount invested or borrowed. Often contrasted with preparing their reports on financial statements. See Present value, which is the future cash flows minus inter- Auditor’s report and Section 5.8. est included in them. See Section 10.7. Going concern A fundamental assumption in financial accounting that a firm will be financially viable and remain in business long enough to see all of its current plans carried out. If G a firm is not a going concern, normal accounting princi- ples do not apply. See Liquidation value and Sections 5.2, GAAP 8.2, and 9.2. See Generally accepted accounting principles and Sections 5.1, 5.3, 6.4, 8.2, and 8.5. Goods and services tax See GST and Sections 7.2 and 7.6. GAAS See Generally accepted auditing standards and Section 5.8. Goodwill The difference between the price paid for a group of Gain, gains assets and the sum of their apparent fair (market) Usually refers to the profit (proceeds minus book value) values. Arises when a bundle of assets or a whole obtained from the disposition of assets (or liabilities) not company is acquired and when the difference is positive. normally disposed of in the daily course of business, (“Badwill,” a negative difference, is not recognized.) See such as from selling land, buildings, or other noncurrent Sections 2.9, 2.11, 8.14, and 9.7. assets, or from refinancing debt. Gains are considered Goodwill arising on consolidation nonoperating items and so, if they are material, they are segregated from normal revenues and expenses on the Goodwill existing only in Consolidated financial state- ments accounted for using the Purchase method, indi- income statement and the cash flows involved are cating that the Parent corporation paid more for its included in the investing or financing sections of the investment in a Subsidiary corporation included in the cash flow statement. See Sections 7.7 and 8.11. consolidated statements than the fair values of the Gain (loss) on sale subsidiary’s assets. See Goodwill and Sections 2.9 and A Gain on sale occurs when a company receives a 9.7. larger amount of proceeds for an asset than its book value. An income statement account is then credited Accounting procedures, usually different from GAAP with the difference. A Loss on sale occurs when the for businesses but in recent years becoming more like asset’s book value is more than the proceeds received GAAP, used to account for governments and their from the sale. An income statement account is then agencies. See Section 5.5. debited with the difference. See Book value and Sections 7.7 and 8.11. Governments In this book, governments are used mainly as an exam- General journal ple of organizations that have accounting systems and An accounting record used mainly to record accrual prepare financial statements but do not have the charac- adjustments (journal entries) not provided for in sepa- teristics of businesses, especially the goals and ownership rate specialized journals. See Sections 3.8 and 7.2. structure. See Section 5.5. Governments also levy GST,

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GLOSSARY OF TERMS G-17

income and other taxes and so have an influence on sheet, creating a Write-off or loss expense. See businesses’ accounting. See Sections 7.6 and 9.3. Sections 8.2 and 8.14. Gross margin or gross profit IN(ATI) Revenue minus cost of goods sold expense. See The after-tax overall interest rate paid by an enterprise on Sections 3.4 and 10.4. its liabilities. Used in the Scott formula. See Section 10.6. Gross margin ratio or gross profit ratio Income Equals (Revenue – Cost of goods sold expense) / The (net) income of a business is the residual after Revenue. See Ratios and Section 10.4, Ratio 5, where the deducting expenses from revenues. Also referred to as gross margin (or gross profit) ratio is defined and profit or earnings. See Accrual income, Cash income, explained. See also Section 3.4. Net income, and Sections 1.9, 2.3, 3.3, 3.4, and 6.6. GST (Goods and services tax) Income before (income) tax The Canadian federal goods and services tax, a kind of An amount equal to revenue plus other income minus sales tax which businesses must collect on most of their all other ordinary expenses except income tax. Appears revenue and remit to the government after deducting quite low down on the income statement. Some any GST the businesses paid on their own purchases. See nontaxed or special items, such as Extraordinary items, HST, PST, and Sections 7.2 and 7.6. are placed after income tax has been deducted, and are therefore not part of income before income tax. See H Section 3.5. Harmonization Income from continuing operations The movement toward making countries’ accounting Income after deducting income tax but before adding standards the same as those of other countries, which gains or deducting losses from Discontinued operations. would strengthen the internationalization of accounting See Section 3.5. standards. See Section 5.5. Income measurement Historical cost A phrase used to describe financial accounting’s way of The dollar value of a transaction on the date it happens, calculating (net) income as shown on the income state- normally maintained in the accounting records from ment. The phrase is also used to describe the general then on because of accounting’s reliance on transactions problem of determining what income is and considering as the basis for recording events. The cost, or historical alternatives to the usual Accrual accounting basis. See cost, of an asset is therefore the dollar amount paid for it Sections 3.2 and 8.2. or promised to be paid as of the date the asset was acquired. See Cost, Lower of cost or market, Income smoothing Conservatism, and Sections 1.7, 5.2, 8.2, and 9.2. The “manipulation” of net income so that the year-to- year variations in reported income are reduced. See HST Sections 3.10 and 6.4. Harmonized sales tax. See GST and Section 7.6. Income statement A financial statement that summarizes revenues and I expenses of a business for a stated period of time IASB and computes the residual net income (revenues minus expenses). Sometimes referred to as “Statement See International Accounting Standards Board and of Earnings,” “Statement of Operations,” or Section 5.4. “Statement of Income.” See components of the IASC income statement such as Revenue, Expense, and See International Accounting Standards Committee. Net income; also Financial performance and Sections 1.1, 3.3, and 3.5. Impaired assets Assets whose value to the business has gone down Income tax since they were acquired. This is especially used in Tax assessed on income, according to laws about the reference to Investments and Goodwill, which, if computation of income for income tax purposes. See impaired, have to be reduced in value on the balance Sections 3.5 and 9.3.

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G-18 GLOSSARY OF TERMS

Income tax allocation Intercorporate investments The attempt to allocate income tax expense to the Investments by one corporation in other corporations. See appropriate year or activity to which it applies, even if it Consolidation, Equity basis, Cost basis, and Section 9.6. is paid in another year or in aggregate across activities. Interest See Income tax expense, Deferred income tax, Future income tax, Intraperiod tax allocation, and Sections 3.5 The amount charged by a lender for the use of and 9.3. borrowed money. See Sections 3.5, 10.2, and 10.7. Income tax expense Interest coverage ratio An estimate of the current and future income tax arising Usually calculated as (Income before interest expense + from the income as computed on the income statement Income tax) / Interest expense. See Ratios and and matched to the revenues and expenses shown on the Section 10.4, Ratio 20, where the interest coverage ratio statement. See Income tax allocation and Sections 3.5 is defined and explained. and 9.3. Interim financial reporting Income tax payable Reporting financial position and performance at a The liability for the amount of income tax due on the shorter interval than one year. The most common exam- year’s income, calculated according to the income tax ple is the three-month “quarterly reporting” done by law whether or not that matches the Income tax companies listed on stock exchanges. See Section 5.6. expense. See Section 9.3. Internal auditor Indenture An auditor who works for the enterprise and thus verifies A contract signed by a borrower and lender under which information for management’s use and to help the the borrower undertakes to meet certain conditions, enterprise perform better. See Section 1.5 and contrast such as keeping the working capital ratio above a speci- with External auditor. fied amount, violation of which would give the lender Internal control the right to ask for immediate repayment of the loan or to take other action. See Section 9.3. Methods of providing physical security and management control over an enterprise’s cash, inventories, and other Independence assets. See Sections 7.2–7.9. Having no financial or other interest that would influ- Internal financing ence one’s decisions. External auditors are expected to be independent of the enterprises they audit, and so can Financing provided from funds raised in day-to-day oper- hold no shares, nor management positions, etc. See ations rather than by borrowing or issuing equity. See Sections 1.4, 5.8, and 5.9. Cash from operations and Section 4.7. Indirect method of cash flow analysis International Accounting Standards Board (IASB) The traditional method of deriving the Cash flow state- The international accounting standard-setter, headquar- ment, especially the Cash from operations section, by tered in London, England. See Sections 5.4 and 5.5. adjusting net income for noncash items. See Sections 4.3 International Accounting Standards Committee (IASC) and 4.5. The predecessor of the International Accounting Information system Standards Board (IASB). An organized and systematic way of providing informa- Interperiod tax allocation tion to decision makers. Accounting is an information system. See also Management information system and Allocating the enterprise’s income tax expenses over Section 1.7. several years to match the expenses to the incomes shown in the income statement. Necessitated by timing Input market value differences between GAAP and the income tax law in the The market value of an asset calculated as the amount it recognition of various revenues and expenses. See would cost to replace or reproduce it. See Replacement Sections 3.5 and 9.3. Contrast Intraperiod tax allocation. cost and Section 8.2. Intraperiod tax allocation Intangible assets The attempt to match income tax expense to the various Nonphysical, noncurrent assets such as copyrights, items in the income statement, especially separating patents, trademarks, import and export licences, other general income tax expense from that due to special rights that give a firm an exclusive or preferred position items below that expense on the income statement, such in the marketplace, and goodwill. See Assets, as Extraordinary items and Discontinued operations. See Amortization, Goodwill, and Sections 2.11, 7.7, and 8.14. Sections 3.5 and 9.3.

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GLOSSARY OF TERMS G-19

Inventory(ies) L The goods purchased or manufactured by a company for sale, resale, or further use in operations, including L/E finished goods, goods in process, raw materials, and Total liabilities / Total equity, the Debt-equity ratio used supplies. See Current assets, Inventory costing, and in the Scott formula. See Section 10.6. Sections 2.3, 2.4, 3.3, 7.9, and 8.7. Last-in, first-out Inventory costing See LIFO and Section 8.7. Comprises various methods of determining the cost of Lease inventory for balance sheet valuation purposes and of valuing cost of goods sold. The more common methods A contract requiring the user of an asset to pay the are FIFO, LIFO, and Weighted average. See also owner of the asset a predetermined fee for the use of the Sections 8.4 and 8.7. asset. See Section 8.14. Leasehold improvements Inventory turnover Assets such as fixtures, decorating, and alterations Cost of goods sold expense / Average inventory assets. installed into rented (leased) premises and so being See Ratios and Section 10.4, Ratio 13, where inventory economic assets for the enterprise even though not turnover is defined and explained. strictly owned because they form part of the leased prop- Inventory valuation erty. Such improvements are usually amortized over the The process of determining the amount at which inven- period of the lease, as a reasonable estimate of their tory is shown on the balance sheet, normally the Lower useful life. See Sections 3.12 and 8.4. of cost or market. See Inventory costing and Section 8.7. Ledger Investing activities Any book or electronic record that summarizes the The category of the Cash flow statement that describes transactions from the “books of original entry” in the the cash used to acquire, or the cash obtained by dispos- form of accounts. See Accounts, General ledger, ing of, noncurrent assets. See Section 4.3. Journals, Trial balance, and Section 7.2. Letter to the shareholders Investments Part of the Annual report, it is a letter from senior Usually refers to such assets as shares or bonds held for management to the shareholders, summarizing major their financial return (interest or dividends), rather decisions and strategies, commenting on the company’s than for their use in the enterprise’s operations. See performance for the year and usually looking ahead to Sections 8.5, 9.6, and 10.2. future performance. See Section 5.6. Investors Leverage People who own Investments and who, because of their Leverage, or financial leverage, refers to the increased rate interest in the value of those shares or bonds, are inter- of return on owners’ equity when assets earn a return ested in information about the enterprises issuing such larger than the interest rate paid for debt financing them. shares and bonds. See Sections 1.5 and 5.10. The Scott formula indicates how part of the Return on equity is made up of Operating return and Leverage return. See Scott formula and Sections 10.4 and 10.6. J Leverage analysis Study of the financial statements and corporate financial Joint venture structure in order to determine how, and how well, the A business arrangement between corporations that is company is making use of Leverage. See Section 10.6. like a corporate partnership. See Section 9.6. Leverage potential Journal entry The difference between operating return (return on A record of a transaction or accrual adjustment that lists assets) and borrowing cost, which produces Leverage the accounts affected and in which the total of the debits when multiplied by the degree of borrowing in the Scott equals the total of the credits. See Account and formula. See Section 10.6. Sections 2.4, 2.6, and 3.8. Leverage return Journals The portion of the Return on equity that is due to earn- Records in which accounting transactions of a similar ing more return on borrowed funds than it costs in inter- nature are permanently recorded. See Books of original est to borrow them. See Scott formula, Operating entry, General journal, and Section 7.2. return, and Section 10.6.

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G-20 GLOSSARY OF TERMS

Liability Long-term debt-equity ratio A debt or obligation, legally existing or estimated via Calculated as (Long-term loans + Mortgages + Bonds + accrual accounting techniques, of the enterprise to Similar long-term debts) / Total equity. See Ratios and another party (creditor) arising from a past transaction Section 10.4, Ratio 16, where the ratio is defined and (for example, a bank loan, a shareholder loan, an explained. account payable, a mortgage, an accrued expense, or Loss, losses deferred revenue). See Creditor and Sections 1.1, 2.3, 2.9, 2.10, 9.2, and 9.3. Usually refers to the case of a negative return (proceeds being less than book value) obtained from the disposi- Liability method tion of assets (or liabilities) not normally disposed of in A method of Income tax allocation in which the impact the daily course of business, such as from selling land, of Future income tax is estimated according to what is buildings or other noncurrent assets, or from refinanc- expected to be paid rather than according to past timing ing debt. These are considered nonoperating items and differences as done in the former Deferred income tax so are, if material, segregated from normal revenues and accounting. The liability method is common in other expenses on the income statement, and the cash flows countries, and Canada has recently adopted it. See involved are included in the investing or financing Section 9.3. sections of the cash flow statement. See Sections 2.3, 3.3, 7.7, and 8.11. LIFO Loss on sale A cost flow assumption that is the opposite of FIFO. “Last in, first out” assumes that the units sold are from Selling a noncurrent asset for less than its book value. See the most recent purchases and thus bases cost of goods Gain (loss) on sale, Book value, Loss, and Sections 7.7 sold on the most recent purchases and ending inventory and 8.11. on the oldest purchases. Because of this, in a period of Lower of cost or market inflation the LIFO cost of goods sold figure is usually the A method of valuing items of inventory, temporary highest of the inventory costing methods, and the inven- investments, or other current assets, under which losses tory value on the balance sheet is usually the lowest. See inherent in declines of the market prices of items held Cost flow assumption, FIFO, Weighted average, below their costs are recognized in the period in which Inventory costing, and Section 8.7. such declines become apparent. Gains from market Line of credit increases above cost are not recognized until the items Advance approval from a bank to borrow money under are sold. Lower of cost or market is a conservative agreed conditions. A line of credit usually means that procedure. See Conservatism and Sections 8.2, 8.5, the borrower can get the money as needed (for exam- and 8.9. ple, when the bank account is overdrawn), without further approval. M Liquidation value The value of a firm’s assets if they are all to be sold off Management when it is no longer a going concern. See Section 8.2. The people (managers) who run the day-to-day opera- tions of an enterprise or other organization, in contrast Liquidity to the shareholders (investors), members, and voters who The excess of very short-term assets over short-term own or legally control the enterprise. See Section 1.3. debts, and so the measure of a company’s ability to pay its immediate obligations in cash at the present moment. Management accounting See Solvency and Sections 4.2, 4.8, and 10.4 (Ratios Accounting information designed to aid management in 18–20). its operation and control of the firm, and in its general decision making. It is different from Financial account- Listed (shares) ing, which is aimed primarily at users external to the A listed company (corporation) is one whose shares are firm. See Section 1.3. available for trading on a Stock exchange. See Public Management discussion and analysis (MD&A) company and Sections 5.3 and 5.10. A section of a company’s annual report in which Loans from shareholder(s) management reviews the results for the year and Informal loans to the corporation by shareholder(s), explains what happened in some detail. The MD&A is who therefore act as creditors as well as owners. They are used by many analysts to supplement ratios and other most common in private company corporations. See forms of analysis. See Annual report and Sections 5.6 Section 9.3. and 10.3.

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GLOSSARY OF TERMS G-21

Management information system Material, The accounting, marketing, production, employee, and In accounting, material means that the magnitude of other recordkeeping and reporting systems within the an omission or misstatement of accounting informa- enterprise used by management in its internal decision tion makes it probable that, in the light of surrounding making. Often abbreviated as MIS and often associated circumstances, the judgment of a reasonable person with computer systems. See Management accounting, relying on the information would have been changed Electronic commerce, and Section 7.3. or influenced by the omission or misstatement. Materiality and Decision relevance are both defined in Management of corporate financial disclosure terms of what influences or what makes a difference to Steps taken by management to manage the outward a decision maker. A decision not to disclose certain flow of information about an enterprise, much as information may be made because it is believed that other aspects of the enterprise are managed. See investors or other users have no need for that kind of Section 3.10. information (it is not relevant) or that the amounts Managers involved are too small to make a difference (it is not material). See Relevance and Sections 3.5, 5.2, 5.3, See Management and Section 1.3. and 6.4. Manipulation MD&A The accusation that management, in choosing its See Management discussion and analysis and Sections 5.6 accounting and disclosure policies, attempts to make the and 10.3. performance and position measures suit its wishes. See Sections 3.10 and 6.4. Measurement, measuring Marginal analysis The attachment of dollar figures to assets, liabilities, revenues, and expenses in order to produce the figures Focusing on revenues or expenses that change between (values) on the balance sheet and to enable the compu- two alternatives, rather than including all revenues and tation of income (revenues minus expenses) and equity expenses, so as to highlight effects. See “What if” (assets minus liabilities). See Asset valuation, Balance (effects) analysis and Section 1.12. sheet valuation, Income measurement, Recognition, Marketable securities Income, and Section 8.2. Investments having a ready market for resale and held Merger as a way of earning a return from temporarily The joining together of two corporations such that the unneeded cash. See Temporary investments and owners of both become the owners of the combined Sections 8.5 and 9.6. corporation and both corporations are approximately Market capitalization equal contributors to the combination. See Section 9.7. An estimate of the value of a listed public company made Minority interest, noncontrolling interest by multiplying the current share price times the number An account in the liabilities part of the consolidated of shares issued and outstanding. See Section 2.3 and balance sheet. The percentage of the subsidiary’s comments under Ratio 9 in Section 10.4. equity not owned by the parent company is designated Market value as minority (noncontrolling) interest liability. A minor- See Fair market value and Sections 2.3, 8.2, and 8.3. ity (noncontrolling) interest expense calculated in a similar way is also deducted in computing consolidated Markup net income. See Consolidation and Sections 2.9 The difference between the enterprise’s selling prices and 9.7. for its products and the unit costs it incurs for those Mortgage products, often a function of a specific decision to add a profit margin to the cost incurred. See comments about A form of Security on a loan in which the lender has a markup in Section 3.4 regarding Gross margin and direct claim on title to property specified in the mort- Sections 7.9 and 8.9 regarding the Retail inventory gage. Usually used to finance the acquisition of that control method. property. See Sections 2.3, 2.7, and 9.3. Matching, Moving average cost, moving weighted average The concept of recognizing expenses in the same See AVGE, Average cost, and Section 8.7. in which the related revenues are recognized. See Accrual accounting, Expense recogni- tion, Revenue recognition, and Sections 5.2, 5.3, 5.8, 6.3, 6.4, 8.6, and 9.3.

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G-22 GLOSSARY OF TERMS

N Noncurrent liabilities Liabilities expected to be repaid or otherwise removed Net more than one year in the future. See Liability and In accounting, net means the residual after one quantity Sections 2.3 and 9.3. is subtracted from another. Examples are Net book Nonoperating cash flows value, Net income, Net-of-tax analysis, and Net realiz- able value. See Section 2.7. Cash inflows and outflows related to noncurrent invest- ments, financing, and usually dividends, and so separate Net book value from the cash flows resulting from day-to-day operations. The cost of an asset minus any accumulated deprecia- See Cash flow statement and Sections 4.2 and 4.3. tion, amortization, allowance for doubtful accounts, and No-par (shares) so on. See Book value and Sections 7.7 and 8.11. Shares having no legal minimum issue price (Par value) Net income and whose proceeds are thus simply added to share Equals income minus income tax expense, plus or minus capital at whatever price is obtained in each issue. See extraordinary and special items (each Net of any income Section 2.9. tax). See Income, Retained earnings, Matching, and Notes, Notes to the financial statements Sections 1.12, 3.3, 3.5, and 6.3. Notes appended to the statements, providing information Net loss about the accounting policies chosen and other supple- Negative Net income. See Section 3.3. mentary information helpful to interpreting the figures. See Sections 1.3, 2.3, 2.7, 4.7, 5.6, 5.7, 6.4, and 10.3. Net-of-tax analysis A method of determining the impact of management Notes payable decisions or accounting changes in which the effects of Accounts payable that are supported by signed contracts income tax are included to produce the net after-tax or other agreements and usually carry interest. Often effect of the decision or change. See Sections 1.12, 10.2, used to describe financing obtained from banks and and 10.8. other financial institutions that is used to provide operat- ing funds or funds for construction prior to completion Net present value of projects. Notes may be used prior to obtaining more The present value of future cash flows minus the initial secured financing like a Mortgage. investment required to obtain those cash flows. See Section 8.2. Notes receivable Accounts receivable supported by signed contracts or Net realizable value other agreements specifying repayment terms, interest The fair market value that an asset will bring if it is sold rate, and other conditions. See Section 8.6. through the usual product market minus any comple- tion or disposal costs. See Fair market value, Lower of Not-for-profit accounting cost or market, and Sections 8.2 and 8.9. Procedures used to account for nonbusiness, nongovern- ment entities. These procedures increasingly follow Neutrality GAAP. See Section 5.5. An objective of preparing financial accounting informa- tion in which the information should represent phenom- Not-for-profit organizations ena neutrally, without attention to the particular In this book, another example of organizations, other than interests of any party or parties. See Objectivity, Governments, that have accounting systems and prepare Independence, and Section 5.2. financial statements but differ from businesses, especially in goals and ownership structure. See Section 5.5. Noncontrolling interest The portion of a Subsidiary corporation included in consolidated financial statements that is not owned by the controlling (majority) owners of the Parent O corporation. See Minority interest, Consolidation, and Objectivity Sections 2.9 and 9.7. The notion that the information in financial statements Noncurrent assets must be as free from bias as possible, in order that all Assets expected to bring benefit for more than one fiscal user groups can have confidence in it. An accountant year. See Fixed assets, Current assets, and Sections 2.3 attempts to record and report data that are based on and 8.11. objective sources to make the data more acceptable to

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GLOSSARY OF TERMS G-23

outside parties. Because completed arm’s-length trans- Overhead costs actions are supported by documents that can be verified Costs of manufacturing inventories or constructing by any interested observer, these constitute the preferred other assets that are incurred indirectly, such as heat, basis of measurement. See Fairness, Neutrality, power, and supervisors’ salaries. See Section 8.4. Relevance, Reliability, and Sections 1.4, 5.2, 5.3, and 5.8. Owners Off-balance-sheet financing Parties who have contributed resources in return for the Methods of obtaining financing that avoid having to right to dividends and any residual value (equity) of the record the sources as liabilities or equity. See Sections 2.9 enterprise. See Sections 1.5, 2.9, and 9.4. and 9.5. Owner’s capital Ontario Securities Commission (OSC) The owner’s equity of the proprietor of an unincorpo- The securities-trading regulator for Ontario and the rated business. See Capital, Equity, and Sections 2.9 leading such regulator in Canada. See Section 5.4. and 9.4. Operating activities Owners’ equity See Cash from operations and Section 4.2. See Equity, Shareholders’ equity, and Sections 2.3, 2.9, Operating income before tax 2.10, and 9.4. The income after deducting the day-to-day expenses incurred in earning revenues but before deducting expenses coming from other sources such as interest P (based on borrowing), gains or losses on asset disposals, and income tax. See Section 3.10. Pacioli Operating lease ’s Suma is the first known book describing double-entry bookkeeping. It was published in 1494 and A contract to rent or use an asset that does not convey quickly became influential in the development of rights similar to ownership of the asset and that there- accounting and business in Europe. See Section 2.2. fore is accounted for simply as rental expense. See Capital lease and Section 8.14. Packing slip Operating return A document accompanying a shipment that describes the shipment’s contents and can be used to verify the The return earned by an enterprise before considering supplier’s invoice for the cost of the shipment. See the cost of financing and usually also before considering Section 7.2. nonrecurring items. See Leverage return, Scott formula, and Section 10.6. Parent Opportunity cost The dominant corporation in a corporate group linked The return that could have been earned if funds were by ownership, the name of which is usually used in the used in another way than the way they are being used or consolidated financial statements. See Sections 2.9 are proposed to be used. It is called a cost because it is and 9.7. the return given up by not adopting that other use. See Partners’ capital, Partners’ equity Section 10.7. The owners’ equity section of a partnership’s balance OSC sheet. See Partnership and Sections 2.3, 2.9, and 9.4, and See Ontario Securities Commission and Section 5.4. the example in Section 3.8. Other assets Partnership A catch-all category used for noncurrent (and occasion- A contractual agreement among individuals to share ally current) assets that do not fit into other categories, resources and operations in a jointly run business. This are not material individually but aggregate to a material form of business does not have the privilege of limited total. See Section 8.14. liability. See Corporation, Proprietorship, and Sections 2.9 and 9.4. Output market value Par value The market value of an asset if sold. See Net realizable value and Section 8.2. A value set as the legal minimum amount for which a corporation’s shares may be issued. Used in earlier years Overdraft to prevent “watering the stock” and other frauds in See Bank overdraft and Section 2.7. which managers sold shares cheaply to themselves or

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G-24 GLOSSARY OF TERMS

their friends and then outvoted more legitimate share- the corporation does not repay the loans or pay interest holders. With the protection to shareholders provided on schedule. See Section 9.3. by greater regulation and scrutiny of companies’ affairs Petty cash in the present time, Canadian companies typically have No-par shares instead, but par value is still used in many A small fund of cash kept on hand by an employee for other jurisdictions, including some in the United States. paying small expenses such as postage, minor supplies, See Contributed surplus and Sections 2.9 and 9.4. and courier charges. See Section 7.5. PE, PE ratio Plug The price-earnings ratio is calculated as the current price The double-entry system requires that debits equal cred- of a share in the corporation divided by its earnings per its. If adding up all the debits and the credits does not share. See Price-earnings ratio, Ratios, and Section 10.4, produce two equal figures, the statements must be Ratio 10, where the ratio is defined and explained. adjusted so that a balance occurs. The amount of adjust- ment needed is often called a “plug.” This would only be Percentage of completion needed if there had been an error somewhere, though A method of allocating revenue (and associated sometimes the word plug is used in criticism of accrual, expenses) over several fiscal periods during which the consolidation, or other adjustments that produce revenue is earned. Used for long-term construction amounts the critic does not like. contracts, franchise revenue, and similar multi-period revenues. See Sections 6.7 and 6.8. Point of sale Often used to refer to the point in time when a sale has Period expenses been completed and the product or service has been Expenses that are related to the passage of time rather delivered to the customer, which is the most common than to the level of sales volume or other activities. point of recognizing revenue. See Revenue recognition Examples are interest, many salaries, and portions of and Sections 6.6 and 6.7. some Overhead costs such as heat, light, and property taxes. See Section 6.6. Pooling of interests method A type of business combination (compare with Purchase Periodic inventory control method method). In pooling of interests, the assets, liabilities, A method of calculating inventory that uses data on equities, revenues, and expenses of the firms are added beginning inventory, additions to inventory, and an end- together using their book values. See Consolidation and of-period count to deduce the cost of goods sold. See Section 9.7. Perpetual inventory control method, Retail inventory control method, and Section 7.9. Post-closing accounts The accounts as they exist after the revenues, expenses, Periodic reporting and dividends accounts have been transferred to A basic convention of financial accounting that holds retained earnings (“closed”). See Sections 3.6 and 3.7. that accounting information must be assembled and presented to users at regular intervals (at least yearly and Post-closing trial balance often quarterly or monthly). See Section 6.5. A Trial balance of the Post-closing accounts. See Section 3.7. Perpetual inventory control method Post, posting, posted A method of controlling inventory that maintains contin- Transfer, transferring, or having transferred journal uous records on the flow of units of inventory. Thus, entries to ledger accounts and thereby making them there are figures on record for beginning inventory, permanent. The only way to fix a mistake is to use an each unit added to inventory, and each unit removed adjusting or correcting entry and post that. See from inventory for sale. From this, an ending inventory Sections 2.5, 2.6, 3.6, 3.8, and 7.2. figure can be determined and checked against the figure from a physical count. This method provides better Preferred shares internal control than the periodic inventory method, but Ownership shares having special rights in addition to (or it is also more costly to maintain the extra records. See instead of) those going with common shares. See Periodic inventory control method and Section 7.9. Sections 2.9 and 9.4. Personal guarantees Premium Additional Security on loans, often taken by banks lend- Arises when bonds are issued at a price above their legal ing to private corporations, in which some or all share- face value, such as a $100 bond being issued for $105 holders sign agreements to contribute personal assets if cash, indicating a $5 premium. See Section 9.3.

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GLOSSARY OF TERMS G-25

Prepaid expense Prior-period adjustment An expenditure recorded as a current asset because the A method formerly used in Canada but not recom- benefit will be obtained in the near future (for exam- mended anymore by Accounting standards, in which ple, insurance coverage good for the next year). See accounting is done separately for a gain or loss specifi- Section 6.10. cally identified with and directly related to the activities of particular prior periods, but not attributable to Preparers economic events occurring subsequent to those periods Managers and accountants who produce financial (so net income of those later periods is not increased or statements. See Section 1.5. decreased because doing so could cause a distortion in Present value the later results). Future cash inflows or outflows reduced to their “pres- Professional ethics ent” amount by removing from them the interest that Codes of conduct to guide professionals in applying could have been earned or paid had the money been on their professional judgment and that are conducive to hand for investment today. See Sections 8.6, 8.14, 9.3, their professional activities. See Sections 5.8 and 5.9. and 10.7. Professionalism Present value analysis Acting according to the levels of competence, ethics, Analysis of future cash flows done by removing the independence, etc., expected of professionals. See presumed interest components of those flows. See Section 5.9. Discounted cash flows and Section 10.7. Professional judgment Priced to yield The judgment of professionals about problems in their A reference to issuing a security such as a bond for domain—for example, that of accountants or auditors different proceeds than the face value (the amount that about financial accounting matters. See Section 5.9. will have to be repaid), so that, based on those proceeds, the bond’s effective interest rate equals Profit (“yields”) some desired rate. For example, a $100 5% See Net income and Section 2.3. bond could be issued for less than $100 cash so that the bond’s interest would amount to 6% on the lower Profit margin amount the bond sold for. The bond would be said to See Sales return ratio, Ratios, and Section 10.4, Ratio 3, yield 6%. See Section 10.7. where the sales return or profit margin ratio is defined and explained. Price-earnings ratio Market price of one share of a corporation divided by Pro forma earnings earnings per share. See PE ratio, Ratios, and Section 10.4, An income number other than that reported as net Ratio 10, where the ratio is defined and explained. income, which is suggested for use to evaluate a company’s performance rather than net income. Pro Price-level-adjusted historical cost forma earnings, like EBITDA, usually do not include A rarely used asset valuation method in which the histor- various major expenses, especially losses and write-offs, ical cost of each asset is revalued for inflation. See and so are a more positive measure of income than net Historical cost, Fair market value, and Section 8.2. income. See Section 3.10. Price to book ratio Proprietor’s equity The ratio of a share’s current market value to its Book The Equity of an unincorporated business that is owned value, or in aggregate, the ratio of the company’s total by a single person. See Section 2.9. Market capitalization to the Book value of its equity. See Sections 2.3, 2.10, and 10.4, Ratio 9, where the ratio is Proprietorship defined and explained. A firm that is neither a corporation nor a partnership but is under the sole control of one individual. Such a Principal firm is not legally separate from that individual. See (1) In interest calculations, the principal is the amount Partnership, Corporation, and Sections 2.9 and 9.4. of money initially borrowed, lent, or invested and on which interest is calculated. See Section 10.7. (2) In Prospectus some kinds of Contracts, the principal is the person A formal document that includes detailed financial to whom the Agent is responsible. See Sections 5.11 information, which is required by law when a company and 10.7. invites the public to subscribe to its securities.

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G-26 GLOSSARY OF TERMS

Provision Quick ratio Another phrase for a usually noncurrent accrual such as Cash, temporary investments, and accounts receivable for future pension costs or warranties (see Section 9.3). divided by current liabilities. Also called the acid test Particularly common when the liability is created to ratio. See Ratios and Sections 2.3 and 10.4, Ratio 19, anticipate losses or major expenses involved in discontin- where the ratio is defined and explained. uing a business line, refinancing debts, or disposing of major assets. See Section 9.3. PST R Provincial sales tax. See Section 7.6. Public accounting, Public accounting firms R&D Offering auditing, accounting, tax, consulting, and Research and development activities, a controversial related services to the public on a professional basis. accounting problem because the activities are intended Some of these firms are very large, with thousands of to lead to future benefits and thus their costs may be professionals and staff, while others are very small one- considered to be assets, yet GAAP require that generally person offices. See Sections 1.5 and 5.8. such costs be charged to expense as incurred. See Section 8.14. Public company Ratios, ratio analysis A Corporation whose shares and related securities are sold widely to members of the public and other investors Numbers produced by dividing one financial statement and whose securities are traded on Stock exchanges and figure by another figure; for example, the working capi- other capital markets. See Sections 2.9 and 5.10. tal ratio is the total current assets figure divided by the total current liabilities figure. Standard ratios are used Purchase method to assess aspects of a firm, particularly profitability, A type of accounting for business combinations solvency, and liquidity. See Sections 10.2, 10.4, and (compare with the Pooling of interests method). Under 10.6. Section 10.4 describes 20 common ratios. See this method, which is the overwhelmingly dominant Section 10.4. method of determining consolidated financial statement Realized figures, the assets and liabilities of the acquired company are added to those of the parent at fair values and any Used in this book as a synonym of received, or collected. difference between the portion of the sum of fair values Revenue is recognized when earned, but that is usually acquired by the parent and the total price paid is before it is collected or realized. See Revenue recogni- accounted for as goodwill. See Consolidation and tion and Sections 6.3 and 6.6. Section 9.7. Receivable Purchase order Funds expected to be collected by the enterprise. The A document used when a formal request to buy products usual kind is trade Accounts receivable, but other kinds or services is made. See Section 7.2. include taxes receivable, employee expense advances receivable, and Notes receivable. See Section 2.4. PV Reclassification (entry) See Present value and Section 10.7. A journal entry or repositioning of an account that changes the location of the account within the balance sheet or within the income statement but Q does not affect income. See Classification policies and Section 2.7. Qualified opinion Reclassified account A report by the external auditors that indicates there is a deficiency in the financial statements. See Section 5.8. An account moved to a different place within a financial statement without changing income or equity. See Quarterly financial reporting Sections 2.7 and 8.5. A form of Interim financial reporting in which the finan- Recognition cial statements are issued to cover three-month periods. See Section 5.6. Giving effect in the accounts to revenue believed to be earned, or expenses believed to be incurred, before (or Quarterly report after) the cash is collected or paid. See Revenue recogni- See Quarterly financial reporting and Sections 1.3 and tion, Expense recognition, and Sections 5.2, 6.4, 6.6, 6.7, 5.10. and 6.8.

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GLOSSARY OF TERMS G-27

Recognized Retained earnings Revenues or expenses (usually), entered into the Earnings not yet distributed to owners; the sum of net accounts or given effect in the accounts. See Recognition incomes earned over the life of a company, less distribu- and Section 6.2. tions (dividends declared) to owners. See Equity and Sections 2.3, 2.9, 3.3, 3.5, and 9.4. Reconcile, Reconciliation The Analysis technique of comparing two sets of infor- Retained earnings statement mation that relate to the same account or activity and See Statement of retained earnings and Sections 3.3, 3.4, identifying differences that indicate errors in either or 3.5, and 5.5. both records. See Bank reconciliation and Sections 1.12, Return 4.9, 7.5, and 7.9. Some amount of gain (income or performance) usually Recordkeeping measured in relation to the amount invested to get the The bookkeeping and other methods used to create the return. See Risk, Sections 5.10 and 10.2, and such ratios underlying records on which accounting information is as Return on equity and Return on assets in Sections 10.4 based. See Sections 5.2, 5.3, 6.2, and 6.3. and 10.6. Redeemable Return on assets (ROA or ROA(ATI)) Net income, before considering interest expense or the Shares or bonds that have the right to be sold back to tax saving provided by interest expense, divided by total the company. See Section 9.5. assets. This measures the Operating return before the Refined ROA cost of financing. See Ratios and Sections 10.3 and 10.4, A version of the Return on assets ratio. See ROA(ATI), Ratio 2, where the ratio is defined and explained, and Ratios, and Section 10.4, Ratio 2, where the ratio is Section 10.6, where it is used in the Scott formula. defined and explained. Return on equity (ROE) Relevance Net income divided by owners’ equity. The most The capacity of information to make a difference in a frequently used ratio for measuring the business’s return decision by helping users to form predictions about the to owners. See Ratios and Sections 10.2 and 10.4, Ratio 1, outcomes of past, present, and future events, or to where the ratio is defined and explained, and Section 10.6, confirm or correct prior expectations. See Decision rele- where it is used in the Scott formula. vance and Sections 5.2 and 5.3. Return on investment (ROI) Reliability A general term for measures of return related to the investment needed to earn the return. See Return on A characteristic of information that is represented faith- assets, Return on equity, and Section 10.2. fully and is free from bias and verifiable. See Timeliness, Objectivity, and Sections 5.2 and 5.3. Revenue Replacement cost The amount of benefit received or promised from the sale of goods or services, before any deductions for the The price that will have to be paid in order to replace an cost of providing the goods or services. See Income state- existing asset with a similar asset. This amount is likely to ment, Revenue recognition, and Sections 1.10, 3.3, 3.5, be different from that of Fair market value or Net realiz- 6.3, and 6.6. able value. See also Lower of cost or market and Sections 8.2 and 8.9. Revenue recognition The entering into the accounts of the amount of Resources revenue determined, according to the firm’s accounting In financial accounting, the recognized assets of the enter- policies, to be attributable to the current period. See prise as shown on the balance sheet. See Section 2.3. Accrual accounting, Accounts receivable, Revenue, and Sections 6.3, 6.6, and 6.7. Retail inventory control method Providing internal control and deducing inventory Review amounts for financial statements by using ratios of cost A report prepared on an enterprise’s financial state- to selling price; for example, deducing cost of goods ments by a Public accounting firm that is less than an sold from sales revenue minus the markup on cost. Audit but more than a Compilation: the accounting firm Ending inventory cost can be determined by measuring studies the statements’ contents and compliance with inventory at retail prices minus markup. See Perpetual GAAP to determine if there are any apparent problems inventory method, Periodic inventory method, Inventory but does not verify individual accounts or the underlying costing, and Sections 7.9 and 8.9. records. See Section 5.8.

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G-28 GLOSSARY OF TERMS

Risk Securities The probable variability in possible future outcomes Shares, bonds, and other financial instruments issued by above and below the expected level of outcomes (for corporations and governments and usually traded on example, returns), but especially below. Risk and return Capital markets. See Sections 5.10 and 9.3. go hand in hand, because a high risk should mean a Securities and Exchange Commission (SEC) higher potential return and vice versa. See Section 5.10 and Return, and Section 10.4, Ratios 14–20. An agency of the U.S. government that supervises the registration of security issues, prosecutes fraudulent ROA stock manipulations, and regulates securities trans- See Return on assets. actions in the United States. See Sections 5.4 and 5.10. ROA(ATI) Security See Refined ROA, Return on assets, and Sections 10.3, (1) Singular of Securities. (2) Protection to a lender or 10.4, and 10.6. other creditor in which the lender is given rights to specific assets (as in a Mortgage), more general rights to ROE monitor the borrower (Debenture or Indenture), or See Return on equity and Sections 10.4 and 10.6. other promises (such as Personal guarantees). ROI Segmented information See Return on investment and Section 10.2. Financial statement information desegregated by geographical or economic area of activity in order to provide greater insight into financial performance and position. Segmented information is usually placed at the S end of the notes to the financial statements. Sales invoice Segregation of duties A document containing the details of a sale. See Section 7.2. An internal control technique whereby tasks involved in sensitive assets such as cash, accounts receivable, or Sales journal inventories are divided up so that no one both handles A record of sales made, used to produce the Revenue the asset and keeps the records of the asset. See data in the accounts. See Books of original entry and Sections 7.3 and 7.5. Section 7.2. Share capital Sales return The portion of a corporation’s equity obtained by issu- The ratio of net income to revenue. See Ratios and ing shares in return for cash or other considerations. See Section 10.4, Ratio 3, where the ratio is defined and Sections 2.3, 2.9, and 9.4. explained, and Section 10.6, where a refined version (SR(ATI)) is used in the Scott formula. Shareholders The holders of a corporation’s Share capital, and so the Sales taxes owners of the corporation. See Section 1.4. Taxes the enterprise must charge its customers and remit to the government. See Section 7.6. Shareholders’ equity The sum of shareholders’ direct investment (share SCFP (Statement of changes in financial position) capital) and indirect investment (retained earnings). See Cash flow statement. See Share capital, Equity, Retained earnings, and Sections 2.3, 2.9, and 9.4. Scott formula A financial analysis technique for studying leverage Share split effects by combining a group of ratios into a more Reissuing shares in which the number of new shares is comprehensive explanation of performance. The some multiple of the previous number. For example, a formula separates Return on equity into Operating two-for-one split results in a shareholder owning twice as return and Leverage return. See Leverage, Ratios, and many shares as before. Because there has been a change Section 10.6. only in the number of shares but not in the underlying value of the corporation, the share price should fall in SEC accordance with the split (e.g., the new shares above See Securities and Exchange Commission and should have a share price about half the previous price). Sections 5.4 and 5.10. See Section 9.4.

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GLOSSARY OF TERMS G-29

Shares (stock) Standard cost Units of Share capital, evidenced by certificates and, for A method of determining manufactured inventory costs Public companies, traded on Capital markets with other that uses expected normal production costs rather than Securities. See Sections 2.3 and 2.9. actual costs. See Section 8.9. Significant accounting policies Stated value The main choices among possible accounting methods A value provided to shares that is similar to Par value but made by the enterprise in preparing its financial state- less legally binding. See Section 2.9. ments. These policies are usually summarized in the first note to the financial statements. See Accounting policies, Statement of cash flows Notes to the financial statements, and Sections 5.6, 5.7, See Cash flow statement and Section 4.2. and 6.4. Statement of changes in financial position (SCFP) Significant influence See Cash flow statement and Section 4.2. An investment in another corporation that is not large Statement of financial position enough for voting control but is large enough to influ- ence how that corporation does business. See Equity A synonym for Balance sheet. See Section 2.3. basis and Section 9.6. Statement of retained earnings Society of Management Accountants of Canada A financial statement that summarizes the changes in (SMA-Canada) retained earnings for the year. Change in retained earn- A society whose members have had training in tax, ings equals Net income minus Dividends plus or minus accounting, , and other related areas, with any retained earnings adjustments. See Sections 3.3, 3.4, a particular focus on internal management accounting, and 5.5. and have passed qualifying exams. It is one of the three Statement of source and application of cash national professional accounting bodies. See See Cash flow statement and Section 4.2. Accountant. Stewardship Solvency The concept that some persons (for example, manage- The condition of being able to meet all debts and obliga- ment) are responsible for looking after the assets and tions. See Statement of changes in financial position, interests of other persons (for example, shareholders), Liquidity, Sections 3.4 and 4.2, and Section 10.4, Ratios and that reports should be prepared that will be suitable 18–20. to allow the “stewards” to be held accountable for the Source documents actions taken on behalf of the other persons. See Agent The evidence required to record a Transaction. See and Sections 2.2, 3.2, and 5.11. Section 7.2. Stock-based compensation Sources A way of paying executives and other employees by The right-hand side of the balance sheet (liabilities and giving them shares in the company or Stock options that equity) are the sources of the enterprise’s assets. See allow them to acquire shares in the future at attractive Section 2.3. prices. Such compensation is in addition to salaries and bonuses. See Section 9.5. Specialized Ledgers used to keep track of particular assets, liabilities, Stock dividend or equities, such as accounts receivable, fixed assets, or A Dividend paid by issuing more shares to present share- share capital. See Section 7.2. holders rather than paying them cash. See Sections 3.3 and 9.4. Specific identification Accounting for inventories according to the specific cost Stock exchange of the items, which therefore requires some sort of iden- A place where Shares and other Securities are traded. tification of the items, such as by serial number. Contrast See Section 5.10. Assumed cost flow and see Section 8.7. Stockholder SR(ATI) An alternative term for Shareholder, particularly used in See Sales return and Section 10.4. the United States.

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G-30 GLOSSARY OF TERMS

Stock market Taxable income A Capital market in which equity shares are traded. Income calculated according to income tax law and used Often used as a generic term for stock exchanges and as the basis for computing income tax payable. See capital markets. See Sections 1.5, 2.3, 3.2, and 5.10. Section 9.3. Stock option(s) Temporary differences Promises, usually made to senior managers, to issue Differences between accounting calculations of income shares to them at specified prices. The prices are usually and calculations required for income tax purposes that set to be higher than present prices but lower than will eventually net out to zero. These affect income tax expected future prices, to provide an incentive to work expense calculations. See Section 9.3. to increase those future prices. See Sections 3.10 and Temporary investments 9.5. Investments made for a short term, often used as a place Stocks to put temporarily excess cash to work. See Sections 8.5 Usually used to mean Shares, but also used to mean and 9.6. Inventories, as in “stocktaking” for counting inventories. Term preferred shares See Section 2.3. Preferred shares issued with a fixed term and dividend Straight-line amortization (depreciation) rate, and therefore having some of the characteristics of A method of computing amortization (depreciation) debt. See Section 9.5. simply by dividing the difference between the asset’s cost Timeliness and its expected salvage value by the number of years the asset is expected to be used. It is the most common Timely information is usable because it relates to present amortization method used in Canada. See Amortization decision needs. Information received late may be too and Section 8.12. late to be usable, since decisions pass it by. See Relevance, Reliability, and Section 5.2. Subsidiary Time value of money A company that is owned by another company (the Parent). The parent need not own all the subsidiary’s Money can earn interest, so money received in the shares, but does own at least a majority of the voting future is worth less in “present value” terms because the lower amount can be invested to grow to the future shares of the subsidiary. See Consolidation and amount. Money has a time value because interest accrues Sections 2.9 and 9.7. over time. See Present value and Section 10.7. Subsidiary ledgers Toronto Stock Exchange See Specialized ledgers. The leading Stock exchange in Canada. See Section 5.4. Sum-of-years’-digits Total assets turnover An accelerated method of computing amortization The ratio of revenue to total assets. See Ratios and (depreciation) that produces a declining annual Section 10.4, Ratio 12, where the ratio is defined and expense, which is used in the United States but is rare explained. See also Section 10.6, where the ratio is used in Canada. See Accelerated amortization and Note 21 in the Scott formula. to Chapter 8. Trade receivables Synoptic These are Accounts receivable arising in the normal A bookkeeping record listing cash transactions of the course of business with customers. See Section 8.6. business. Transaction An accounting transaction is the basis of bookkeeping T and is defined by four criteria described and explained in Section 1.7. T-account Transaction base A T-shaped representation of a ledger account used in analysis or demonstration. See Section 2.5. The idea that financial accounting is substantially defined by the use of the Transaction as the fundamental Tangible assets recordkeeping basis underlying the accounting data. See See Fixed assets and Section 8.4. Section 1.7.

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GLOSSARY OF TERMS G-31

Treasury shares (stock) Value in use Share capital issued and then reacquired by the firm that The value of an asset determined by the future cash issued the shares. The result is a reduction of sharehold- flows it brings in, or the future expenses that will be ers’ equity because resources have been used to reduce avoided by owning the asset. See Section 8.2. the actual amount of outstanding equity. See Sections 2.9 Verifiability and 9.4. Ability to trace an accounting entry or figure back to the Trial balance underlying evidence of its occurrence and validity. See A list of all the general ledger accounts and their Source documents and Sections 1.7, 5.2, 5.3, and 5.8. balances. The sum of the accounts with debit balances should equal the sum of those with credit balances. This is contrasted with the Chart of accounts, which lists only W the account names. See Account and Sections 2.5, 3.6, Warrants 3.7, and 3.8. Attachments to shares or bonds giving rights to acquire TSX further shares or bonds on specified terms. See Section 9.5. The Toronto Stock Exchange. See Section 5.4. Weighted average An inventory cost flow assumption that determines cost U of goods sold and ending inventory cost by averaging the cost of all of the inventory available during the period. Unadjusted trial balance See AVGE, Average cost, LIFO, FIFO, Inventory costing, and Section 8.7. The Trial balance of the accounts prior to making vari- ous accrual adjustments in preparation for the financial “What if” (effects) analysis statements. See Sections 3.8 and 3.9. Analyzing potential business decisions or accounting policies by determining their effects on income, cash Unaudited flow, or other important items. See Sections 1.12, 10.8, Refers to financial statements that have not received an and 10.9. External audit and so are not accompanied by an Auditor’s opinion. See Section 5.8. Working capital The difference between current assets and current Units-of-production amortization liabilities. See Current assets, Current liabilities, and An amortization (depreciation) method in which the Sections 2.3 and 9.2, and 10.4. annual amortization expense varies directly with the year’s production volume. See Section 8.12. Working capital ratio Current assets divided by current liabilities. See Ratios Unusual items and Sections 2.3 and 9.2 and Section 10.4, Ratio 18, Unusual revenues or expenses that are large enough to where the ratio is defined and explained. be worth identifying separately in the income statement. Work order See Section 3.5. A document specifying the components and assembly or Users other work to be done to provide a product ordered by a People who use financial statements to assist them in customer. See Section 7.2. deciding whether to invest in the enterprise, lend it Write-down money, or take other action involving financial information. See Section 1.5. Reducing an asset’s value on the balance sheet but not removing the asset completely (which is a Write-off). See Sections 7.7 and 8.11. V Write-off Refers to the elimination of an asset from the balance Valuation sheet. If there is a Contra account against the asset Determining the amounts at which assets, liabilities, already, the write-off is made against the contra, so and equity should be shown in the balance sheet. See expense and income are not affected. If there is no Section 8.2. contra account, the write-off (a Direct write-off,

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G-32 GLOSSARY OF TERMS

Section 7.7) is made to an expense or a loss account and Y income is reduced. See Sections 7.7 and 8.11. Yield Write-off (bad debts) The effective interest rate a financial instrument such as Refers to eliminating an account receivable deemed to a Bond earns, given the amount of money received when be uncollectible. If the elimination is done by deducting it was issued. See Present value and Section 10.7. the amount from both the Accounts receivable asset and the Allowance for doubtful accounts, there is no effect on income. Otherwise, the write-off reduces income. NOTES See Section 7.7. Write-off (noncurrent assets) 1. Some supplementary help in developing this glossary orig- inally came from the CICA Handbook (Toronto: Canadian Refers to eliminating a noncurrent asset, such as land, Institute of Chartered Accountants, various versions); buildings, equipment, investments or Goodwill, deemed S. Davidson, C.L. Mitchell, C.P. Stickney, and R.L. Weil, not to have further value to the enterprise. The elimina- Financial Accounting: An Introduction to Concepts, Methods tion is done by removing both the asset cost and the and Uses (Toronto: Holt, Rinehart & Winston, 1986); Accumulated amortization related to that asset, if any. Funk & Wagnalls Canadian College Dictionary (Markham: Income is reduced by the amount by which the asset cost Fitzhenry & Whiteside, 1986); and Ross M. Skinner, exceeds the accumulated amortization. Otherwise, the Accounting Standards in Evolution (Toronto: Holt, Rinehart write-off reduces income. See Sections 7.7 and 8.11. & Winston, 1987).

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