Term
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Definition
| The specific accounting principles and methods a company currently uses and considers most appropriate to present fairly its financial statements. (p. 1516). |
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Term
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Definition
| An auditors report in which the exceptions to fair presentation are so material that in the independent auditors judgment, the financial statements taken as a whole are not in accordance with GAAP. Adverse opinions are rare; the SEC will not permit a company listed on an exchange to file statements with an adverse opinion. (p. 1536). |
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Term
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Definition
| An accounting professional who conducts an independent examination of a companys accounting data. (p. 1533). |
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Term
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Definition
| The results of an independent examination of a companys accounting data, including whether the financial statements are in accordance with GAAP. (p. 1533). |
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Term
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Definition
| Those incurred for the benefit of more than one segment and whose interrelated nature prevents a completely objective division of costs among segments. (p. 1526). |
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Term
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Definition
| The FASB, in recognizing that certain disclosure requirements are costly and unnecessary for certain companies, has eliminated reporting requirements for nonpublic enterprises in such areas as fair values of financial instruments and segment reporting. (p. 1515). |
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Term
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Definition
| Appropriate when the auditor has gathered so little information on the financial statements that no opinion can be expressed. (p. 1536). |
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Term
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Definition
| The belief that companies should treat each interim period as a separate accounting period. (p. 1528). |
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Term
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Definition
| Unintentional accounting mistakes. (p. 1520). |
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Term
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Definition
| A set of prospective financial statements that present to the best of the responsible partys knowledge and belief, a companys expected financial position, results of operations, and cash flows. (p. 1539). |
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Term
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Definition
| Prospective financial statements that present to the best of the responsible partys knowledge and belief, given one or more hypothetical assumptions, an entitys expected financial position, result of operations, and cash flows. (p. 1539). |
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Term
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Definition
| Intentional distortions of financial statements. (p. 1520). |
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Term
| fraudulent financial reporting |
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Definition
| Defined as intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements. (p. 1543). |
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Term
| full disclosure principle |
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Definition
| Accounting principle that dictates that in deciding what information to report, companies follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. It recognizes that the nature and amount of information included in financial reports reflects a series of judgmental trade-offs between sufficient detail that makes a difference to users, sufficient condensation to make the information understandable, and the costs and benefits of providing the information. (p. 1514). |
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Term
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Definition
| Violations of laws and regulations, such as illegal political contributions, bribes, and kickbacks. If a company derives revenue from an illegal act that is considered material in relation to the financial statements, this information should be disclosed. (p. 1520). |
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Term
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Definition
| The belief that the interim report is an integral part of the annual report and that deferrals and accruals should take into consideration what will happen for the entire year. (p. 1528). |
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Term
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Definition
| How a company can meet the segmented reporting objective, by providing financial statements segmented based on how the companys operations are managed. (p. 1524). |
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Term
| managements discussion and analysis (MD&A) |
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Definition
| Mandated by the SEC, this section of the annual report covers three financial aspects of an enterprises business: liquidity, capital resources, and results of operations. In it, management highlights favorable or unfavorable trends and identifies significant events and uncertainties that affect these three factors. (p. 1536). |
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Term
| nonrecognized subsequent event |
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Definition
| An event that provides evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date; adjustment of the financial statements is not necessary. (p. 1521). |
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Term
| notes to financial statements |
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Definition
| A set of disclosures in a companys financial statements that further explain the items presented in the main body of the statements. The additional information provided in the notes does not have to be quantifiable, nor does it need to qualify as an accounting element. Notes to the financial statements are considered an integral part of the statements. (p. 1517). |
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Term
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Definition
| A component of an enterprise (1) that engages in business activities from which it earns revenues and incurs expenses, (2) whose operating results are regularly reviewed by the companys chief operating decision maker to assess segment performance and to allocate resources to the segment; and (3) for which discrete financial information is available that is generated by or based on the internal financial reporting system. (p. 1524). |
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Term
| post-balance-sheet events |
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Definition
| Significant financial events that took place after the formal balance sheet date but before final issuance and that may materially affect the companys financial position. Also referred to as subsequent events. Some postbalance-sheet events require adjustments to the accounts. Notes to the financial statements should explain postbalance-sheet events. (p. 1521). |
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Term
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Definition
| An auditors report that contains an exception to the standard opinion, but usually not of sufficient magnitude to invalidate the statements as a whole. (p. 1535). |
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Term
| recognized subsequent event |
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Definition
| An event that provides additional evidence about conditions that existed at the balance sheet date, including the estimates inherent in the process of preparing financial statements. Recognized subsequent events require adjustments to the financial statements. (p. 1521). |
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Term
| related-party transactions |
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Definition
| When a company engages in transactions in which one of the parties has the ability to significantly influence the policies of the other. Related-party transactions may also occur when a nontransacting party has the ability to influence the policies of the two transacting parties. (p. 1519). |
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Term
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Definition
| The SEC-provided protection to a company that presents an erroneous forecast, as long as that company prepared the forecast on a reasonable basis and disclosed it in good faith. (p. 1540). |
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Term
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Definition
| When most of a companys sales occur in one short period of the year, while certain costs are spread more equally throughout the year, for example, retailers for which much of their sales occur in the holiday season. (p. 1531). |
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Term
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Definition
| Significant financial events that took place after the formal balance sheet date but before issuance and that may materially affect the companys financial position. Also referred to as postbalance-sheet events. Some subsequent events require adjustments to the accounts. Notes to the financial statements should explain subsequent events. (p. 1521). |
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Term
| unqualified or clean opinion |
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Definition
| The auditors opinion that the financial statement present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conformity with GAAP. (p. 1535). |
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Term
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Definition
| Extensible business reporting language, a computer language adapted from the code of the Internet that tags accounting data to correspond to financial reporting items that are reported in the balance sheet, income statement, and cash flow statement. (p. 1541). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Computed as cash plus short-term investments plus net receivables divided by current liabilities. A variation of the current ratio, the acid-test ratio eliminates inventories and prepaid expenses from the amount of current assets, to provide better information for short-term creditors. (p. 1549). |
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Term
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Definition
| Measures of how effectively a company is using its assets. Common activity ratios are: receivables turnover, inventory turnover, and asset turnover. (p. 1548). |
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Term
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Definition
| Activity ratio that measures how efficiently a company uses its assets to generate sales. Computed as net sales divided by average total assets for the period. The resulting number is the dollars of sales produced by each dollar invested in assets. (p. 1549). |
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Term
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Definition
| The amount each share of stock would receive if a company were liquidated, based on the amounts reported on the balance sheet. Computed as common stockholders equity divided by the number of outstanding shares of stock. If the valuations on the balance sheet do not approximate fair value, the book value per share figure loses its relevance. (p. 1549). |
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Term
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Definition
| Measure of solvency that indicates a companys ability to repay its liabilities from cash generated from operations (without having to liquidate productive assets). Computed as the ratio of cash provided by operating activities to total debt, as represented by average total liabilities. (p. 1549). |
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Term
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Definition
| Also called vertical analysis, the proportional expression of each financial statement item in a given period to a base figure, with the result that all of the elements within each statement are expressed in percentages of some common number and always add up to 100 percent. (p. 1552). |
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Term
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Definition
| The use of the same information for two or more different dates or periods, so that like items may be compared. (p. 1551). |
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Term
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Definition
| Measures of the degree of protection for long-term creditors and investors. Common coverage ratios are: debt to total assets, times interest earned, the cash debt coverage ratio, and book value per share. (p. 1548). |
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Term
| current cash debt coverage ratio |
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Definition
| Measure of liquidity that indicates a companys ability to pay its short-term debts. Computed as cash provided by operating activities divided by average current liabilities. (p. 1549). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Computed as total current assets divided by total current liabilities. (p. 1549). |
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Term
| debt to total assets ratio |
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Definition
| Coverage ratio that measures the percentage of the total assets provided by creditors. Computed as total debt divided by total assets. The higher the percentage of debt to total assets, the greater the risk that the company may be unable to meet its maturing obligations. (p. 1549). |
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Term
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Definition
| A distilled and important income figure, calculated as net income minus preferred dividends (income available to common stockholders), divided by the weighted average of common shares outstanding. Companies must disclose earnings per share on the face of the income statement. (p. 1549). |
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Term
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Definition
| The proportionate change over a period of time. (p. 1552). |
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Term
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Definition
| The number of times on average a company sells its inventory during the period. Computed as the cost of goods sold divided by the average inventory on hand during the period. Analysts compute average inventory from beginning and ending inventory balances. (p. 1549). |
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Term
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Definition
| Measures of a companys short-run ability to pay its maturing obligations. Common liquidity ratios are: the current ratio, the quick or acid-test ratio, and the current cash debt coverage ratio. (p. 1548). |
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Term
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Definition
| Profitability ratio that measures the percentage of earnings a company distributes to common stockholders in the form of cash dividends. Computed as cash dividends paid to common stockholders divided by net income available to common stockholders (net income minus preferred dividends). (p. 1549). |
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Term
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Definition
| Reducing a series of related amounts to a series of percentages of a given base, e.g., expressing all items in an income statement as a percentage of sales. (p. 1552). |
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Term
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Definition
| Profitability ratio that measures the companys use of its assets to produce net income. Also called rate of return on sales. Computed as net income divided by net sales. This measure indicates the percentage of each dollar of sales that results in net income. By relating the profit margin on sales to the asset turnover for the period, we can find out how profitably the company used assets during that period of time. (p. 1549). |
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Term
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Definition
| Measures of the degree of success or failure of a given company or division for a given period of time. Common profitability ratios are: profit margin on sales, rate of return on assets, rate of return on common stock equity, earnings per share, the price-earnings ratio, and the payout ratio. (p. 1548). |
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Term
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Definition
| Liquidity ratio that measures the ability of a company to meet its maturing obligations with its available assets and to meet unexpected needs for cash. Computed as cash plus short-term investments plus net receivables divided by current liabilities. A variation of the current ratio, the quick ratio (also referred to as the acid-test ratio) eliminates inventories and prepaid expenses from the amount of current assets, to provide better information for short-term creditors. (p. 1549). |
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Term
| rate of return on assets (ROA) |
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Definition
| The rate of return a company achieves through use of its assets. Computed as net income divided by average total assets. ROA indicates the amount of net income generated by each dollar invested in assets. By relating the profit margin on sales to the asset turnover for the period, analysts can find out how profitably the company used assets during that period of time. (p. 1549). |
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Term
| rate of return on common stock equity |
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Definition
| Profitability ratio that indicates how many dollars of net income the company earned for each dollar invested by the common stockholders. Also called return on equity (ROE). Computed as net income less preferred dividends divided by average common stockholders equity. (p. 1549). |
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Term
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Definition
| An activity ratio that measures the number of times, on average, a company collects receivables during a period. Computed by dividing net sales by average (net) accounts receivable outstanding during the year. Barring significant seasonal factors, average receivables outstanding can be computed from the beginning and ending balances of net trade receivables. (p. 1549). |
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Term
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Definition
| Solvency ratio that indicates the companys ability to meet interest payments as they come due. Computed as income before income taxes and interest expense divided by interest expense. (p. 1549). |
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Term
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Definition
| The proportional expression of each financial statement item in a given period to a base figure. (p. 1552). |
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