Notes On Accrual Accounting

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Chapter 5

Accrual accounting
A company records the financial effects of transactions and other events and circumstances in the periods when they occur rather than in the periods when it receives or pays cash; measures the accomplishments (resources created) and the efforts (resources used up) so that the reported net income measures the results of the company’s income-generating activities.
Asset Test
Test of a reportable segment where its segment assets are 10% or more of the combined assets of all operating segments.
Association of cause and effect
Costs recognized as expenses on the basis of a direct association with specific revenues; some transactions result simultaneously in both a revenue and an expense.
Capital maintenance concept
A corporatio’s net income for a period of time is the amount that it could distribute to shareholders without depleting the capital the shareholders have invested; the amount of money that can be distributed to shareholders as a return on capital, without being a return of capital. Concept asserts that capital must be maintained before a corporation earns income on that capital.
Common-size analysis
Analysis of income statement information that typically expresses all of the amounts in terms of percentages of total revenues; enables users to identify what proportion of each dollar of revenues is absorbed by various expenses.
Component (of a company)
Operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company.
Comprehensive income
The change in equity of a company during a period from transactions, other events, and circumstances relating to nonowner sources; includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Cost of goods available for sale
Beginning inventory plus net purchases.
Cost of goods sold
The cost of the inventory items sold to customers during the period.
Coverage ratios
Measure the ability to cover the interest charges associated with debt and provide insights about a company’s risk and financial flexibility.
Earnings management
The potential for companies to manipulate reported earnings within U.S. GAAP in order to report higher or lower earnings numbers.
Earnings per share (EPS)
When a company reports net income on a per-share basis.
Earnings quality
The extent to which a company’s earnings are relevant and faithful representations of financial performance for the current period and enable financial statement users to develop reasonable expectations of future earnings.
Outflows or using up assets or incurring liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that are the company’s ongoing major or central operations.
Extraordinary item
An event or a transaction that is unusual in nature and infrequent in occurrence.
Gain (loss) on the sale (of the discontinued component)
The second element of the results from discontinued operations section. The company determines the pretax gain (loss) by subtracting the book value of the net assets (assets minus liabilities) of the component from the net proceeds received (selling price minus any selling costs, such as broker commissions, legal fees, closing costs).
Increases in the equity (net assets) of a company from peripheral or incidental transactions and other events and circumstances during a period, except those that result from revenues or investments by owners.
Gross profit margin
Gross profit divided by total revenues; indicates a company’s ability to generate revenues and control the costs of producing and delivering its products and services.
Gross sales revenues (or gross revenues)
Increases in assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that are the company’s ongoing major or central operations;