Glossary - l absorption costing The reporting of the costs...

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Unformatted text preview: l\ absorption costing The reporting of the costs of manufactured products, normally direct materials, direct labor, and factory overhead, as product costs. (906) accelerated depreciation method A depreciation method that provides for a higher depreciation amount in the first year of the asset’s use, followed by a gradually declining amount of depreciation. (402) account An accounting form that is used to record the increases and decreases in each financial statement item. (52) account form The form of balance sheet that resembles the basic format of the accounting equation, with assets on the left side and Liabilities and Stockholders’ Equity sections on the right side. (20, 215) account payable The liability created by a purchase on account. (12) account receivable A claim against the customer created by selling merchandise or services on credit. (12, 64, 350) accounting An information system that provides reports to stakeholders about the economic activities and condition of a business. (3) accounting cycle The process that begins with analyzing and journalizing transactions and ends with the post—closing trial balance. (158) accounting equation Assets = Liabilities + Owner’s Equity. (10) accounting period concept The accounting concept that assumes that the economic life of the business can be divided into time periods. (102) accounts payable subsidiary ledger The subsidiary ledger containing the individual accounts with suppliers (creditors). (218) accounts receivable analysis A company’s ability to collect its accounts receivable. (681) accounts receivable subsidiary ledger The subsidiary ledger containing the individual accounts with customers. (218) accounts receivable turnover The relationship between net sales and accounts receivable, computed by dividing the net sales by the average net accounts receivable; measures how frequently during the year the accounts receivable are being converted to cash. (366, 681) accrual basis of accounting Under this basis of accounting, revenues and expenses are reported in the income statement in the period in which they are earned or incurred. (102) accrued expenses Expenses that have been incurred but not recorded in the accounts. (105) accrued revenues Revenues that have been earned but not recorded in the accounts. (105) accumulated depreciation The contra asset account credited when recording the depreciation of a fixed asset. (113) accumulated other comprehensive income The cumulative effects of other comprehensive income items reported separately in the Stockholders’ Equity section of the balance sheet. (588) activity analysis The study of employee effort and other business records to determine the cost of activities. (1231) activity base (driver) A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior. Activity bases are also used in the denominator in calculating the predetermined factory overhead rate to assign overhead costs to cost objects. (774, 860, 1181) activity cost pools Cost accumulations that are associated with a given activity, such as machine usage, inspections, moving, and production setups. (1179) activity rate The cost of an activity per unit of activity base, determined by dividing the activity cost pool by the activity base. (1181) activity-based costing (ABC) method A cost allocation method that identifies activities causing the incurrence of costs and allocates these costs to products (or other cost objects), based on activity drivers (bases). (774, 1108, 1179) adjusted trial balance The trial balance prepared after all the adjusting entries have been posted. (120) adjusting entries The journal entries that bring the accounts up to date at the end of the accounting period. (103) adjusting process An analysis and updating of the accounts when financial statements are prepared. (103) administrative expenses (general expenses) Expenses incurred in the administration or general operations of the business. (215) aging the receivables The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age. (357) Allowance for Doubtful Accounts The contra asset account for accounts receivable. (353) allowance method The method of accounting for uncollectible accounts that provides an expense for uncollectible receivables in advance of their write-Off. (351) amortization The periodic transfer of the cost of an intangible asset to expense. (409) annuity A series of equal cash flows at fixed intervals. (542, 1139) appraisal costs Costs to detect, measure, evaluate, and audit products and processes to ensure that they conform to customer requirements and performance standards. (1231) assets The resources owned by a business. (9, 54) available-for-sale securities Securities that management expects to sell in the future but which are not actively traded for profit. (578) average inventory cost flow method The method of inventory costing that is based on the assumption that costs should be charged against revenue by using the weighted average unit cost of the items sold. (266) average rate of return A method of evaluating capital investment proposals that focuses on the expected profitability of the investment. (1135) GL-1 B backflush accounting Simplification of the accounting system by eliminating accumulation and transfer of costs as products move through production. (1228) bad debt expense The operating expense incurred because of the failure to collect receivables. (351) balance of the account The amount of the difference between the debits and the credits that have been entered into an account. (53) balance sheet A list of the assets, liabilities, and stockholders’ equity as of a specific date, usually at the close of the last day of a month or a year. (17) balanced scorecard A performance evaluation approach that incorporates multiple performance dimensions by combining financial and nonfinancial measures. (1060) bank reconciliation The analysis that details the items responsible for the difference between the cash balance reported in the bank statement and the balance of the cash account in the ledger. (319) bank statement A summary of all transactions mailed to the depositor or made available online by the bank each month. (316) bond A form of an interest—bearing note used by corporations to borrow on a long-term basis. (525) bond indenture The contract between a corporation issuing bonds and the bondholders. (528) book value The cost of a fixed asset minus accumulated depreciation on the asset. (402) book value of the asset (or net book value) The difference between the cost of a fixed asset and its accumulated depreciation. (114) boot The amount a buyer owes a seller when a fixed asset is traded in on a similar asset. (415) break-even point The level of business operations at which revenues and expired costs are equal. (869) budget An accounting device used to plan and control resources of operational departments and divisions. (956) GL-2 budget performance report A report comparing actual results with budget figures. (1006) budgetary slack Excess resources set within a budget to provide for uncertain events. (958) budgeted variable factory overhead The standard variable overhead for the actual units produced. (1014) business An organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. (2) business combination A business making an investment in another business by acquiring a controlling share, often greater than 50%, of the outstanding voting stock of another corporation by paying cash or exchanging stock. (573) business entity concept A concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business. (8) business transaction An economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations. (10) C capital expenditures The costs of acquiring fixed assets, adding to a fixed asset, improving a fixed asset, or extending a fixed asset’s useful life. (396) capital expenditures budget The budget summarizing future plans for acquiring plant facilities and equipment. (975) capital investment analysis The process by which management plans, evaluates, and controls long—term capital investments involving property, plant, and equipment. (1134) capital leases Leases that include one or more provisions that result in treating the leased assets as purchased assets in the accounts. (398) capital rationing The process by which management plans, evaluates, and controls long-term capital investments involving fixed assets. (1149) capital stock The portion of a corporation’s stockholders’ equity contributed by investors (owners) in exchange for shares of stock. (11) carrying amount The balance of the bonds payable account (face amount of the bonds) less any unamortized discount or plus any unamortized premium. (534) cash Coins, currency (paper money), checks, money orders, and money on deposit that is available for unrestricted withdrawal from banks and other financial institutions. (312) cash basis of accounting Under this basis of accounting, revenues and expenses are reported in the income statement in the period in which cash is received or paid. (102) cash budget A budget of estimated cash receipts and payments. (972) cash dividend A cash distribution of earnings by a corporation to its shareholders. (492) cash equivalents Highly liquid investments that are usually reported with cash on the balance sheet. (325) cash flow per share Normally computed as cash flow from operations per share. (622) cash flows from financing activities The section of the statement of cash flows that reports cash flows from transactions affecting the equity and debt of the business. (619) cash flows from investing activities The section of the statement of cash flows that reports cash flows from transactions affecting investments in noncurrent assets. (619) cash flows from operating activities The section of the statement of cash flows that reports the cash transactions affecting the determination of net income. (618) cash payback period The expected period of time that will elapse between the date of a capital expenditure and the complete recovery in cash (or equivalent) of the amount invested. (1136) cash short and over account An account which has recorded errors in cash sales or errors in making change causing the amount of actual cash on hand to differ from the beginning amount of cash plus the cash sales for the day. (314) Certified Public Accountant (CPA) Public accountants who have met a state’s education, experience, and examination requirements. (7) chart of accounts A list of the accounts in the ledger. (54) clearing account Another name for the income summary account because it has the effect of clearing the revenue and expense accounts of their balances. (153) closing entries The entries that transfer the balances of the revenue, expense, and drawing accounts to the owner’s capital account. (152) closing process The transfer process of converting temporary account balances to zero by transferring the revenue and expense account balances to Income Summary, transferring the income summary account balance to the retained earnings account, and transferring the dividends account to the retained earnings account. (152) closing the books The process of transferring temporary accounts balances to permanent accounts at the end of the accounting period. (152) common stock The stock outstanding when a corporation has issued only one class of stock. (487) common-sized statement A financial statement in which all items are expressed only in relative terms. (676) compensating balance A requirement by some banks requiring depositors to maintain minimum cash balances in their bank accounts. (325) consigned inventory Merchandise that is shipped by manufacturers to retailers who act as the manufacturer’s selling agent. (279) consignee The name for the retailer in a consigned inventory arrangement. (279) consignor The name for the manufacturer in a consigned inventory arrangement. (279) consolidated financial statements Financial statements resulting from combining parent and subsidiary statements. (573) contingent liabilities Liabilities that may arise from past transactions if certain events occur in the future. (456) continuous budgeting A method of budgeting that provides for maintaining a 12—month projection into the future. (959) continuous process improvement A management approach that is part of the overall total quality management philosophy. The approach requires all employees to constantly improve processes of which they are a part or for which they have managerial responsibility. (734) contra account (or contra asset account) An account offset against another account. (113) contract rate The periodic interest to be paid on the bonds that is identified in the bond indenture; expressed as a percentage of the face amount of the bond. (528) contribution margin Sales less variable costs and variable selling and administrative expenses. (866, 907) contribution margin analysis The systematic examination of the differences between planned and actual contribution margins. (922) contribution margin ratio The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income. (866) control environment The overall attitude of management and employees about the importance of controls. (308) controllable costs Costs that can be influenced (increased, decreased, or eliminated) by someone such as a manager or factory worker. (916) controllable expenses Costs that can be influenced by the decisions of a manager. (1050) controllable revenues Revenues earned by the profit center. (1050) controllable variance The difference between the actual amount of variable factory overhead cost incurred and the amount of variable factory overhead budgeted for the standard product. (1014) controller The chief management accountant of a division or other segment of a business. (733) controlling A phase in the management process that consists of monitoring the operating results of implemented plans and comparing the actual results with the expected results. (734) controlling account The account in the general ledger that summarizes the balances of the accounts in a subsidiary ledger. (219) conversion costs The combination of direct labor and factory overhead costs. (739, 1227) copyright An exclusive right to publish and sell a literary, artistic, or musical composition. (410) corporation A business organized under state or federal statutes as a separate legal entity. (8) correcting journal entry An entry that is prepared when an error has already been joumalized and posted. (72) cost A payment of cash (or a commitment to pay cash in the future) for the purpose of generating revenues. (736) cost accounting system A branch of managerial accounting concerned with accumulating manufacturing costs for financial reporting and decision—making purposes. (767) cost allocation The process of assigning indirect cost to a cost object, such as a job. (774) cost behavior The manner in which a cost changes in relation to its activity base (driver) (860) cost center A decentralized unit in which the department or division manager has responsibility for the control of costs incurred and the authority to make decisions that affect these costs. (1048) cost concept A concept of accounting that determines the amount initially entered into the accounting records for purchases. (8) cost method A method of accounting for equity investments representing less than 20% of the outstanding shares of the investee. The purchase is at original cost, and any gains or losses upon sale are recognized by the difference between the sale proceeds and the original cost. (569) cost object The object or segment of operations to which costs are related for management’s use, such as a product or department. (736) cost of finished goods available for sale The beginning finished goods GL-3 inventory added to the cost of goods manufactured during the period. (743) cost of goods manufactured The total cost of making and finishing a product. (743) cost of goods sold The cost of finished goods available for sale minus the ending finished goods inventory. (743) cost of goods sold budget A budget of the estimated direct materials, direct labor, and factory overhead consumed by sold products. (969) cost of merchandise purchased The cost of net purchases plus transportation costs. (213) cost of merchandise sold The cost that is reported as an expense when merchandise is sold. (211, 742) cost of production report A report prepared periodically by a processing department, summarizing (1) the units for which the department is accountable and the disposition of those units and (2) the costs incurred by the department and the allocation of those costs between completed and incomplete production. (815) cost of quality report A report summarizing the costs, percent of total, and percent of sales by appraisal, prevention, internal failure, and external failure cost of quality categories. (1233) cost per equivalent unit The rate used to allocate costs between completed and partially completed production. (820) cost price approach An approach to transfer pricing that uses cost as the basis for setting the transfer price. (1065) cost variance The difference between actual cost and the flexible budget at actual volumes. (1006) costs of quality The cost associated with controlling quality (prevention and appraisal) and failing to control quality (internal and external failure). (1231) cost-volume-profit analysis The systematic examination of the relationships among selling prices, volume of sales and production, costs, expenses, and profits. (865) cost-volume-profit chart A chart used to assist management in GL-4 understanding the relationships among costs, expenses, sales, and operating profit or loss. (874) credit Amount entered on the right side of an account. (53) credit memorandum (credit memo) A form used by a seller to inform the buyer of the amount the seller proposes to credit to the account receivable due from the buyer. (222) credit period The amount of time the buyer is allowed in which to pay the seller. (221) credit terms Terms for payment on account by the buyer to the seller. (221) cumulative preferred stock Stock that has a right to receive regular dividends that were not declared (paid) in prior years. (488) currency exchange rate The rate at which currency in another country can be exchanged for local currency. (1148) current assets Cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business. (151) current liabilities Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets. (151) current position analysis A company’s ability to pay its current liabilities. (679) current ratio A financial ratio that is computed by dividing current assets by current liabilities. (679) currently attainable standards Standards that represent levels of operation that can be attained with reasonable effort. (1003) D debit Amount entered on the left side of an account. (53) debit memorandum (debit memo) A form used by a buyer to inform the seller of the amount the buyer proposes to debit to the account payable due the seller. (225) debt securities Notes and bond investments that provide interest revenue over a fixed maturity.(566) decision making A component inherent in the other management processes of planning, directing, controlling, and improving. (734) defined benefit plan A pension plan that promises employees a fixed annual pension benefit at retirement, based on years of service and compensation levels. (454) defined contribution plan A pension plan that requires a fixed amount of money to be invested for the employee’s behalf during the employees working years. (454) depletion The process of transferring the cost of natural resources to an expense account. (408) depreciate To lose usefulness as all fixed assets except land do. (113) depreciation The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life. (113, 398) depreciation expense The portion of the cost of a fixed asset that is recorded as an expense each year of its useful life. (113) differential analysis The area of accounting concerned with the effect of alternative courses of action on revenues and costs. (1091) differential cost The amount of increase or decrease in cost expected from a particular course of action compared with an alternative. (1091) differential income (or loss) The difference between the differential revenue and the differential costs. (1091) differential revenue The amount of increase or decrease in revenue expected from a particular course of action as compared with an alternative. (1091) direct costs Costs that can be traced directly to a cost object. (736) direct labor cost The wages of factory workers who are directly involved in converting materials into a finished product. (738) direct labor cost budget Budget that estimates direct labor hours and related costs needed to support budgeted production. (967) direct labor rate variance The cost associated with the difference between the standard rate and the actual rate paid for direct labor used in producing a commodity. (1011) direct labor time variance The cost associated with the difference between the standard hours and the actual hours of direct labor spent producing a commodity. (1011) direct materials cost The cost of materials that are an integral part of the finished product. (737) direct materials price variance The cost associated with the difference between the standard price and the actual price of direct materials used in producing a commodity. (1009) direct materials purchases budget A budget that uses the production budget as a starting point to budget materials purchases. (966) direct materials quantity variance The cost associated with the difference between the standard quantity and the actual quantity of direct materials used in producing a commodity. (1009) direct method A method of reporting the cash flows from operating activities as the difference between the operating cash receipts and the operating cash payments. (619) direct write-off method The method of accounting for uncollectible accounts that recognizes the expense only when accounts are judged to be worthless. (351) directing The process by which managers, given their assigned level of responsibilities, run day—to—day operations. (734) discount The interest deducted from the maturity value of a note or the excess of the face amount of bonds over their issue price. (489, 528) dishonored note receivable A note that the maker fails to pay on the due date. (364) dividend yield A ratio, computed by dividing the annual dividends paid per share of common stock by the market price per share at a specific date, that indicates the rate of return to stockholders in terms of cash dividend distributions. (692) dividends Distribution of a corporation’s earning to stockholders. (14, 54) dividends per share Measures the extent to which earnings are being distributed to common shareholders. (692) double-declining-balance method A method of depreciation that provides periodic depreciation expense based on the declining book value of a fixed asset over its estimated life. (402) double-entry accounting system A system of accounting for recording transactions, based on recording increases and decreases in accounts so that debits equal credits. (55) DuPont formula An expanded expression of return on investment determined by multiplying the profit margin by the investment turnover. (1055) E earnings per common share (EPS) Net income per share of common stock outstanding during a period. (507) earnings per share (EPS) on common stock The profitability ratio of net income available to common shareholders to the number of common shares outstanding. (526, 690) effective interest rate method The method of amortizing discounts and premiums that provides for a constant rate of interest on the carrying amount of the bonds at the beginning of each period; often called simply the "interest method.” (531) effective rate of interest The market rate of interest at the time bonds are issued. (528) electronic data interchange (EDI) An information technology that allows different business organizations to use computers to communicate orders, relay information, and make or receive payments. (1225) electronic funds transfer (EFT) A system in which computers rather than paper (money, checks, etc.) are used to effect cash transactions. (315) elements of internal control The control environment, risk assessment, control activities, information and communication, and monitoring. (307) employee fraud The intentional act of deceiving an employer for personal gain. (307) employee involvement A philosophy that grants employees the responsibility and authority to make their own decisions about their operations. (1224) employee's earnings record A detailed record of each employee’s earnings. (449) engineering change order (ECO) A document that initiates a change in the specification or a product or process. (1180) enterprise resource planning (ERP) An integrated business and information system used by companies to plan and control both internal and supply chain operations. (1225) equity method A method of accounting for an investment in common stock by which the investment account is adjusted for the investor’s share of periodic net income and cash dividends of the investee. (571) equity securities The common and preferred stock of a firm. (566) equivalent units of production The number of production units that could have been completed within a given accounting period, given the resources consumed. (817) ethics Moral principles that guide the conduct of individuals. (4) expenses Assets used up or services consumed in the process of generating revenues. (12, 55) external failure costs The costs incurred after defective units or services have been delivered to consumers. (1231) F factory burden Another term for manufacturing overhead or factory overhead. (738) factory overhead cost All of the costs of producing a product except for direct materials and direct labor. (738) factory overhead cost budget Budget that estimates the cost for each item of factory overhead needed to support budgeted production. (968) factory overhead cost variance report Reports budgeted and actual costs for variable and fixed factory overhead along with the related controllable and volume variances. (1017) GL-5 fair value The price that would be received for selling an asset or paying off a liability, often the market price for an equity or debt security. (574) favorable cost variance A variance that occurs when the actual cost is less than standard cost. (1006) feedback Measures provided to operational employees or managers on the performance of subunits of the organization. These measures are used by employees to adjust a process or a behavior to achieve goals. See management by exception. (734) fees earned Revenue from providing services. (12) FICA tax Federal Insurance Contributions Act tax used to finance federal programs for old—age and disability benefits (social security) and health insurance for the aged (Medicare). (443) financial accounting The branch of accounting that is concerned with recording transactions using generally accepted accounting principles (GAAP) for a business or other economic unit and with a periodic preparation of various statements from such records. (4, 731) Financial Accounting Standards Board (FASB) The authoritative body that has the primary responsibility for developing accounting principles. (7) financial statements Financial reports that summarize the effects of events on a business. (16) finished goods inventory The direct materials costs, direct labor costs, and factory overhead costs of finished products that have not been sold. (741) finished goods ledger The subsidiary ledger that contains the individual accounts for each kind of commodity or product produced. (779) first-in, first-out (FIFO) inventory cost flow method The method of inventory costing based on the assumption that the costs of merchandise sold should be charged against revenue in the order in which the costs were incurred. (266, 815) fiscal year The annual accounting period adopted by a business. (170) GL-6 fixed asset turnover ratio The number of dollars of sales that are generated from each dollar of average fixed assets during the year, computed by dividing the net sales by the average net fixed assets. (414) fixed assets (or plant assets) Long- term or relatively permanent tangible assets such as equipment, machinery, and buildings that are used in the normal business operations and that depreciate over time. (113, 151, 393) fixed costs Costs that tend to remain the same in amount, regardless of variations in the level of activity. (862) flexible budget A budget that adjusts for varying rates of activity. (960) FOB (free on board) destination Freight terms in which the seller pays the transportation costs from the shipping point to the final destination. (227) FOB (free on board) shipping point Freight terms in which the buyer pays the transportation costs from the shipping point to the final destination. (227) free cash flow The amount of operating cash flow remaining after replacing current productive capacity and maintaining current dividends. (637) freight in Costs of transportation. (213) fringe benefits Benefits provided to employees in addition to wages and salaries. (453) future value The estimated worth in the future of an amount of cash on hand today invested at a fixed rate of interest. (540) G general ledger The primary ledger, when used in conjunction with subsidiary ledgers, that contains all of the balance sheet and income statement accounts. (218) general-purpose financial statements A type of financial accounting report that is distributed to external users. The term "general purpose" refers to the wide range of decision—making needs that the reports are designed to serve. (4) generally accepted accounting principles (GAAP) Generally accepted guidelines for the preparation of financial statements. (7) goal conflict A condition that occurs when individual objectives conflict with organizational objectives. (958) goodwill An intangible asset that is created from such favorable factors as location, product quality, reputation, and managerial skill. (411) gross pay The total earnings of an employee for a payroll period. (441) gross profit Sales minus the cost of merchandise sold. (211) gross profit method A method of estimating inventory cost that is based on the relationship of gross profit to sales. (284) H held-to-maturity securities Investments in bonds or other debt securities that management intends to hold to their maturity. (577) high-low method A technique that uses the highest and lowest total costs as a basis for estimating the variable cost per unit and the fixed cost component of a mixed cost. (864) horizontal analysis Financial analysis that compares an item in a current statement with the same item in prior statements. (73, 673) ideal standards Standards that can be achieved only under perfect operating conditions, such as no idle time, no machine breakdowns, and no materials spoilage; also called theoretical standards. (1003) in arrears Cumulative preferred stock dividends that have not been paid in prior years are said to be in arrears. (488) income from operations (operating income) Revenues less operating expenses and service department charges for a profit or an investment center. (215) income statement A summary of the revenue and expenses for a specific period of time, such as a month or a year. (17) Income Summary An account to which the revenue and expense account balances are transferred at the end of a period. (153) indirect costs Costs that cannot be traced directly to a cost object. (736) indirect method A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments. (620) inflation A period when prices in general are rising and the purchasing power of money is declining. (1148) installment note A debt that requires the borrower to make equal periodic payments to the lender for the term of the note. (536) intangible assets Long-term assets that are useful in the operations of a business, are not held for sale, and are without physical qualities. (409) interest revenue Money received for interest. (12) internal controls The policies and procedures used to safeguard assets, ensure accurate business information, and ensure compliance with laws and regulations. (305) internal failure costs The costs associated with defects that are discovered by the organization before the product or service is delivered to the consumer. (1231) internal rate of return (IRR) method A method of analysis of proposed capital investments that uses present value concepts to compute the rate of return from the net cash flows expected from the investment. (1143) International Accounting Standards Board (IASB) An organization that issues International Financial Reporting Standards for many countries outside the United States. (7) inventory analysis A company’s ability to manage its inventory effectively. (682) inventory shrinkage (inventory shortage) The amount by which the merchandise for sale, as indicated by the balance of the merchandise inventory account, is larger than the total amount of merchandise counted during the physical inventory. (231) inventory subsidiary ledger A ledger containing individual accounts with a common characteristic. (218, 265) inventory turnover The relationship between the volume of goods sold and inventory, computed by dividing the cost of goods sold by the average inventory. (282, 683) investee The company whose stock is purchased by the investor. (569) investment center A decentralized unit in which the manager has the responsibility and authority to make decisions that affect not only costs and revenues but also the fixed assets available to the center. (1054) investment turnover A component of the rate of return on investment, computed as the ratio of sales to invested assets. (1055) investments The balance sheet caption used to report long—term investments in stocks not intended as a source of cash in the normal operations of the business. (566) investor The company investing in another company’s stock. (569) invoice The bill that the seller sends to the buyer. (221) J job cost sheet An account in the work in process subsidiary ledger in which the costs charged to a particular job order are recorded. (770) job order cost system A type of cost accounting system that provides for a separate record of the cost of each particular quantity of product that passes through the factory. (767) journal The initial record in which the effects of a transaction are recorded. (57) journal entry The form of recording a transaction in a journal. (58) journalizing The process of recording a transaction in the journal. (58) just-in-time (JIT) processing A processing approach that focuses on eliminating time, cost, and poor quality within manufacturing and nonmanufacturing processes. (830, 1218) L last-in, first-out (LIFO) inventory cost flow method A method of inventory costing based on the assumption that the most recent merchandise inventory costs should be charged against revenue. (266) lead time The elapsed time between starting a unit of product into the beginning of a process and its completion. (1219) ledger A group of accounts for a business. (54) liabilities The rights of creditors that represent debts of the business. (9, 54) limited liability company (LLC) A business form consisting of one or more persons or entities filing an operating agreement with a state to conduct business with limited liability to the owners, yet treated as a partnership for tax purposes. (8) line department A unit that is directly involved in the basic objectives of an organization. (732) long-term liabilities Liabilities that usually will not be due for more than one year. (151) lower-of-cost-or-market (LCM) method A method of valuing inventory that reports the inventory at the lower of its cost or current market value (replacement cost) (277) M management (or managerial) accounting The branch of accounting that uses both historical and estimated data in providing information that management uses in conducting daily operations, in planning future operations, and in developing overall business strategies. (4, 731) management by exception The philosophy of managing which involves monitoring the operating results of implemented plans and comparing the expected results with the actual results. This feedback allows management to isolate significant variations for further investigation and possible remedial action. (734) management process The five basic management functions of (1) planning, (2) directing, (3) controlling, (4) improving, and (5) decision making. (733) Management's Discussion and Analysis (MD&A) An annual report disclosure that provides management’s analysis of the results of operations and financial condition. (694) managerial accounting The branch of accounting that uses both historical GL-7 and estimated data in providing information that management uses in conducting daily operations, in planning future operations, and in developing overall business strategies. (731) manufacturing business A type Of business that changes basic inputs into products that are sold to individual customers. (3) manufacturing cells A grouping of processes where employees are cross—trained to perform more than one function. (831) manufacturing margin The variable cost of goods sold deducted from sales. (907) manufacturing overhead Costs, other than direct materials and direct labor costs, that are incurred in the manufacturing process. (738) margin of safety Indicates the possible decrease in sales that may occur before an operating loss results. (882) market price approach An approach to transfer pricing that uses the price at which the product or service transferred could be sold to outside buyers as the transfer price. (1062) market rate of interest The rate determined from sales and purchases of similar bonds. (528) market segment A portion of business that can be assigned to a manager for profit responsibility. (917) markup An amount that is added to a "cost" amount to determine product price. (1101) master budget The comprehensive budget plan linking all the individual budgets related to sales, cost of goods sold, operating expenses, projects, capital expenditures, and cash. (963) matching concept (or matching principle) A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses. (17, 102) materials inventory The cost of materials that have not yet entered into the manufacturing process. (741) materials ledger The subsidiary ledger containing the individual accounts for each type of material. (769) GL-8 materials requisition The form or electronic transmission used by a manufacturing department to authorize materials issuances from the storeroom. (770) maturity value The amount that is due at the maturity or due date of a note. (363) merchandise available for sale The cost of merchandise available for sale to customers calculated by adding the beginning merchandise inventory to net purchases. (213, 742) merchandise inventory Merchandise on hand (not sold) at the end of an accounting period. (211) merchandising business A type of business that purchases products from other businesses and sells them to customers. (3) mixed cost A cost with both variable and fixed characteristics, sometimes called a semivariable or semifixed cost. (862) mortgage notes An installment note that may be secured by a pledge of the borrower’s assets. (536) multiple production department factory overhead rate method A method that allocated factory overhead to product by using factory overhead rates for each production department. (1175) multiple-step income statement A form of income statement that contains several sections, subsections, and subtotals. (212) N natural business year A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle. (170) negotiated price approach An approach to transfer pricing that allows managers of decentralized units to agree (negotiate) among themselves as to the transfer price. (1063) net income or net profit The amount by which revenues exceed expenses. (17) net loss The amount by which expenses exceed revenues. (17) net pay Gross pay less payroll deductions; the amount the employer is obligated to pay the employee. (441) net present value method A method of analysis of proposed capital investments that focuses on the present value of the cash flows expected from the investments. (1141) net purchases Determined when purchases returns and allowances and the purchases discounts are deducted from the total purchases. (213) net realizable value The estimated selling price of an item of inventory less any direct costs of disposal, such as sales commissions. (278, 353) net sales Revenue received for merchandise sold to customers less any sales returns and allowances and sales discounts. (213) noncontrollable cost Cost that cannot be influenced (increased, decreased, or eliminated) by someone such as a manager or factory worker. (916) nonfinancial measure A performance measure that has not been stated in dollar terms. (1230) nonfinancial performance measure A performance measure expressed in units rather than dollars. (1022) non-value-added activity The cost of activities that are perceived as unnecessary from the customer’s perspective and are thus candidates for elimination. (1234) non-value-added lead time The time that units wait in inventories, move unnecessarily, and wait during machine breakdowns. (1220) normal balance of an account The normal balance of an account can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits. (56) notes receivable A customer’s written promise to pay an amount and possibly interest at an agreed—upon rate. (151, 350) number of days' sales in inventory The relationship between the volume of sales and inventory, computed by dividing the inventory at the end of the year by the average daily cost of goods sold. (282, 683) number of days' sales in receivables The relationship between sales and accounts receivable, computed by dividing the net accounts receivable at the end of the year by the average daily sales. (366, 682) number of times interest charges are earned A ratio that measures creditor margin of safety for interest payments, calculated as income before interest and taxes divided by interest expense. (539, 685) O objectives (goals) Developed in the planning stage, these reflect the direction and desired outcomes of certain courses of action. (734) objectivity concept A concept of accounting that requires accounting records and the data reported in financial statements to be based on objective evidence. (9) operating leases Leases that do not meet the criteria for capital leases and thus are accounted for as operating expenses. (398) operating leverage A measure of the relative mix of a business’s variable costs and fixed costs, computed as contribution margin divided by operating income. (880) operational planning The development of short-term plans to achieve goals identified in a business’s strategic plan. Sometimes called tactical planning. (734) opportunity cost The amount of income forgone from an alternative to a proposed use of cash or its equivalent. (1097) other expense Expenses that cannot be traced directly to operations. (215) other income Revenue from sources other than the primary operating activity of a business. (215) outstanding stock The stock in the hands of stockholders. (487) overapplied factory overhead The amount of factory overhead applied in excess of the actual factory overhead costs incurred for production during a period. (776) owner’s equity The owner’s right to the assets of the business. (9) p par The monetary amount printed on a stock certificate. (487) parent company The corporation owning all or a majority of the voting stock of the other corporation. (573) Pareto chart A bar chart that shows the totals of a particular attribute for a number of categories, ranked left to right from the largest to smallest totals. (1233) partnership An unincorporated business form consisting of two or more persons conducting business as co—owners for profit. (8) patents Exclusive rights to produce and sell goods with one or more unique features. (409) payroll The total amount paid to employees for a certain period. (441) payroll register A multicolumn report used to assemble and summarize payroll data at the end of each payroll period. (446) pension A cash payment to retired employees. (454) period costs Those costs that are used up in generating revenue during the current period and that are not involved in manufacturing a product, such as selling, general, and administrative expenses. (739, 780) periodic inventory system The inventory system in which the inventory records do not show the amount available for sale or sold during the period. (214) perpetual inventory system The inventory system in which each purchase and sale of merchandise is recorded in an inventory account. (214) petty cash fund A special cash fund to pay relatively small amounts. (323) physical inventory A detailed listing of merchandise on hand. (265) planning A phase of the management process whereby objectives are outlined and courses of action determined. (734) posting The process of transferring the debits and credits from the journal entries to the accounts. (61) predetermined factory overhead rate The rate used to apply factory overhead costs to the goods man— ufactured. The rate is determined by dividing the budgeted overhead cost by the estimated activity usage at the beginning of the fiscal period. (774) preferred stock A class of stock with preferential rights over common stock. (487) premium The excess of the issue price of a stock over its par value or the excess of the issue price of bonds over their face amount. (489, 528) prepaid expenses Items such as supplies that will be used in the business in the future. (12, 104) present value The estimated worth today of an amount of cash to be received (or paid) in the future. (540) present value concept Cash to be received (or paid) in the future is not the equivalent of the same amount of money received at an earlier date. (1138) present value index An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested. (1142) present value of an annuity The sum of the present values of a series of equal cash flows to be received at fixed intervals. (542, 1139) prevention costs Costs incurred to prevent defects from occurring during the design and delivery of products or services. (1231) price factor The effect of a difference in unit sales price or unit cost on the number of units sold. (922) price-earnings (PIE) ratio The ratio of the market price per share of common stock, at a specific date, to the annual earnings per share. (691) prime costs The combination of direct materials and direct labor costs. (739) prior period adjustments Corrections of material errors related to a prior period or periods, excluded from the determination of net income. (500) private accounting The field of accounting whereby accountants are employed by a business firm or a not—for—profit organization. (4) process A sequence of activities linked together for performing a particular task. (1023, 1235) process cost system A type of cost system that accumulates costs for each of the various departments within a manufacturing facility. (768, 809) process manufacturers Manufacturers that use large machines to process a continuous flow of raw materials GL-9 through various stages of completion into a finished state. (809) process-oriented layout Organizing work in a plant or administrative function around processes (tasks). (1223) product cost concept A concept used in applying the cost—plus approach to product pricing in which only the costs of manufacturing the product, termed the product cost, are included in the cost amount to which the markup is added. (1104) product costing Determining the cost of a product. (1172) product costs The three components of manufacturing cost: direct materials, direct labor, and factory overhead costs. (739) production bottleneck A condition that occurs when product demand exceeds production capacity. (1109) production budget A budget of estimated unit production. (965) production department factory overhead rates Rates determined by dividing the budgeted production department factory overhead by the budgeted allocation base for each department. (1176) product-oriented layout Organizing work in a plant or administrative function around products; sometimes referred to as product cells. (1223) profit The difference between the amounts received from customers for goods or services provided and the amounts paid for the inputs used to provide the goods or services. (2) profit center A decentralized unit in which the manager has the responsibility and the authority to make decisions that affect both costs and revenues (and thus profits) (1050) profit margin A component of the rate of return on investment, computed as the ratio of income from operations to sales. (1055) profit-volume chart A chart used to assist management in understanding the relationship between profit and volume. (876) profitability The ability of a firm to earn income. (678) proprietorship A business owned by one individual. (8) GL-10 public accounting The field of accounting where accountants and their staff provide services on a fee basis. (7) pull manufacturing A just-in—time method wherein customer orders trigger the release of finished goods, which triggers production, which triggers release of materials from suppliers. (1224) purchase order The purchase order authorizes the purchase of the inventory from an approved vendor. (265) purchases discounts Discounts taken by the buyer for early payment of an invoice. (213) purchases returns and allowances From the buyer’s perspective, returned merchandise or an adjustment for defective merchandise. (213) push manufacturing Materials are released into production and work in process is released into finished goods in anticipation of future sales. (1224) 0 quantity factor The effect of a difference in the number of units sold, assuming no change in unit sales price or unit cost. (922) quick assets Cash and other current assets that can be quickly converted to cash, such as marketable securities and receivables. (459, 680) quick ratio A financial ratio that measures the ability to pay current liabilities with quick assets (cash, marketable securities, accounts receivable). (459, 680) R radio frequency identification devices (RFID) Electronic tags (chips) placed on or embedded within products that can be read by radio waves that allow instant monitoring or production location. (1225) rate earned on common stockholders’ equity A measure of profitability computed by dividing net income, reduced by preferred dividend requirements, by common stockholders’ equity. (689) rate earned on stockholders' equity A measure of profitability computed by dividing net income by total stockholders’ equity. (688) rate earned on total assets A measure of the profitability of assets, without regard to the equity of creditors and stockholders in the assets. (687) rate of return on investment (ROI) A measure of managerial efficiency in the use of investments in assets, computed as income from operations divided by invested assets. (1055) ratio of fixed assets to long-term liabilities A leverage ratio that measures the margin of safety of long—term creditors, calculated as the net fixed assets divided by the long-term liabilities. (684) ratio of liabilities to stockholders' equity A comprehensive leverage ratio that measures the relationship of the claims of creditors to stockholders’ equity. (684) ratio of net sales to assets Ratio that measures how effectively a company uses its assets, computed as net sales divided by average total assets. (686) Raw and In Process (RIP) Inventory The capitalized cost of direct materials purchases, labor, and overhead charged to the production cell. (1227) real (permanent) accounts Term for balance sheet accounts because they are relatively permanent and carried forward from year to year. (152) receivables All money claims against other entities, including people, business firms, and other organizations. (350) receiving report The form or electronic transmission used by the receiving personnel to indicate that materials have been received and inspected. (265, 769) relevant range The range of activity over which changes in cost are of interest to management. (860) rent revenue Money received for rent. (12) report form The form of balance sheet with the Liabilities and Owner’s Equity sections presented below the Assets section. (216) residual income The excess of divisional income from operations over a “minimum” acceptable income from operations. (1058) residual value The estimated value of a fixed asset at the end of its useful life. (399) responsibility accounting The process of measuring and reporting operating data by areas of responsibility. (1047) responsibility center An organizational unit for which a manager is assigned responsibility over costs, revenues, or assets. (957) restrictions Amounts of retained earnings that have been limited for use as dividends. (499) retail inventory method A method of estimating inventory cost that is based on the relationship of gross profit to sales. (283) retained earnings Net income retained in a corporation. (15) retained earnings statement A summary of the changes in the retained earnings in a corporation for a specific period of time, such as a month or a year. (17) revenue Increase in owner’s equity as a result of selling services or products to customers. (12, 55) revenue expenditures Costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets. (396) revenue recognition concept The accounting concept that supports reporting revenues when the services are provided to customers. (102) rules of debit and credit In the double—entry accounting system, specific rules for recording debits and credits based on the type of account. (55) 55 sales The total amount charged customers for merchandise sold, including cash sales and sales on account. (12, 213) sales budget One of the major elements of the income statement budget that indicates the quantity of estimated sales and the expected unit selling price. (964) sales discounts From the seller’s perspective, discounts that a seller may offer the buyer for early payment. (213) sales mix The relative distribution of sales among the various products available for sale. (879, 919) sales returns and allowances From the seller’s perspective, returned merchandise or an adjustment for defective merchandise. (213) Sarbanes-Oxley Act of 2002 An act passed by Congress to restore public confidence and trust in the financial statements of companies. (305) Securities and Exchange Commission (SEC) An agency of the US. government that has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public. (7) selling expenses Expenses that are incurred directly in the selling of merchandise. (215) service business A business providing services rather than products to customers. (3) service department charges The costs of services provided by an internal service department and transferred to a responsibility center. (1050) setup Changing the characteristics of a machine to produce a different product. (1180) single plantwide factory overhead rate method A method that allocates all factory overhead to products by using a single factory overhead rate. (1173) single-step income statement A form of income statement in which the total of all expenses is deducted from the total of all revenues. (216) Six-Sigma A quality improvement process developed by Motorola Corporation consisting of five steps: define, measure, analyze, improve, and control (DMAIC). (1224) slide An error in which the entire number is moved one or more spaces to the right or the left, such as writing $542.00 as $54.20 or $5,420.00. (71) solvency The ability of a firm to pay its debts as they come due. (678) special-purpose fund A cash fund used for a special business need. (324) specific identification inventory cost flow method Inventory method in which the unit sold is identified with a specific purchase. (264) staff department A unit that provides services, assistance, and advice to the departments with line or other staff responsibilities. (733) standard cost A detailed estimate of what a product should cost. (1002) standard cost systems Accounting systems that use standards for each element of manufacturing cost entering into the finished product. (1002) standards Performance goals, often relating to how much a product should cost. (1002) statement of cash flows A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year. (17, 618) statement of cost of goods manufactured The income statement of manufacturing companies. (743) statement of stockholders' equity A summary of the changes in the stockholders’ equity in a corporation that have occurred during a specific period of time. (500) static budget A budget that does not adjust to changes in activity levels. (960) stock Shares of ownership of a corporation. (484) stock dividend A distribution of shares of stock to its stockholders. (494) stock split A reduction in the par or stated value of a common stock and the issuance of a proportionate number of additional shares. (502) stockholders The owners of a corporation. (484) stockholders' equity The owners’ equity in a corporation. (11, 54) straight-line method A method of depreciation that provides for equal periodic depreciation expense over the estimated life of a fixed asset. (400) strategic planning The development of a long-range course of action to achieve business goals. (734) strategies The means by which business goals and objectives will be achieved. (734) GL-11 subsidiary company The corporation that is controlled by a parent company. (573) subsidiary ledger A ledger containing individual accounts with a common characteristic. (218) sunk cost A cost that is not affected by subsequent decisions. (1091) supply chain management The coordination and control of materials, services, information, and finances as they move in a process from supplier, through the manufacturer, wholesaler, and retailer to the consumer. (1225) T T account The simplest form of an account. (52) target costing The target cost is determined by subtracting a desired profit from a market method determined price. The resulting target cost is used to motivate cost improvements in design and manufacture. (1108) temporary (nominal) accounts Accounts that report amounts for only one period. (152) theory of constraints (TOCl A manufacturing strategy that attempts to remove the influence of bottlenecks (constraints) on a process. (1109) time tickets The form on which the amount of time spent by each employee and the labor cost incurred for each individual job, or for factory overhead, are recorded. (771) time value of money concept The concept that an amount of money invested today will earn income. (1135) total cost concept A concept used in applying the cost—plus approach to product pricing in which all the costs of manufacturing the product plus the selling and administrative expenses are included in the cost amount to which the markup is added. (1101) total manufacturing cost variance The difference between total standard costs and total actual costs for units produced. (1007) trade discounts Discounts from the list prices in published catalogs or GL-12 special discounts offered to certain classes of buyers. (229) trade-in allowance The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset. (415) trademark A name, term, or symbol used to identify a business and its products. (410) trading securities Securities that management intends to actively trade for profit. (574) transfer price The price charged one decentralized unit by another for the goods or services provided. (1061) transposition An error in which the order of the digits is changed, such as writing $542 as $452 or $524. (71) treasury stock Stock that a corporation has once issued and then reacquires. (495) trial balance A summary listing of the titles and balances of accounts in the ledger. (70) U unadjusted trial balance A summary listing of the titles and balances of accounts in the ledger prior to the posting of adjusting entries. (70) underapplied factory overhead The amount of actual factory overhead in excess of the factory overhead applied to production during a period. (776) unearned revenue The liability created by receiving revenue in advance. (62, 104) unfavorable cost variance A variance that occurs when the actual cost exceeds the standard cost. (1006) unit contribution margin The dollars available from each unit of sales to cover fixed costs and provide operating profits. (867) unit of measure concept A concept of accounting requiring that economic data be recorded in dollars. (9) units-of—production method A method of depreciation that provides for depreciation expense based on the expected productive capacity of a fixed asset. (401) unrealized gain or loss Changes in the fair value of equity or debt securities for a period. (574) V value-added activity The cost of activities that are needed to meet customer requirements. (1234) value-added lead time The time required to manufacture a unit of product or other output. (1219 value-added ratio The ratio of the value—added lead time to the total lead time. (1220) variable cost concept A concept used in applying the cost—plus approach to product pricing in which only the variable costs are included in the cost amount to which the markup is added. (1105) variable cost of goods sold Consists of direct materials, direct labor, and variable factory overhead for the units sold. (907) variable costing The concept that considers the cost of products manufactured to be composed only of those manufacturing costs that increase or decrease as the volume of production rises or falls (direct materials, direct labor, and variable factory overhead). (865, 907) variable costs Costs that vary in total dollar amount as the level of activity changes. (861) vertical analysis An analysis that compares each item in a current statement with a total amount within the same statement. (675) volume variance The difference between the budgeted fixed overhead at 100% of normal capacity and the standard fixed overhead for the actual production achieved during the period. (1015) voucher A special form for recording relevant data about a liability and the details of its payment. (315) voucher system A set of procedures for authorizing and recording liabilities and cash payments. (315) W whole units The number of units in production during a period, whether completed or not. (817) work in process inventory The direct working capital The excess of the 2 materials costs, the direct labor costs, current assets of a business over its . zero-based budgeting A concept of and the a lied factor overhead current liabilities. 679 . . costs thatpgve entereg into the ( ) budgeting that requires all levels of manufacturing process but are Y management to start from zero and associated with products that have . - ESfimate bUdget data.a.s .if there had tb fl . h d (741) v-eld A measure of materlals usage been no preVIOus act1V1t1es m then‘ no een ms 6 ‘ efficiency. (829) units. (959) GL-13 ...
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Glossary - l absorption costing The reporting of the costs...

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