Ch5 Glossary Essay example

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account form Presentation in a classified balance sheet that lists assets by sections on the left side and liabilities and stockholders' equity by sections on the right side. (p. 225).

adjunct account An account that increases either an asset, liability, or owners' equity account. An example is Premium on Bonds Payable, which, when added to the Bonds Payable account, describes the total bond liability of the company. (p. 241).

availablefor-sale investments Debt or equity securities not classified as heldto-maturity or trading securities. Companies report available-for-sale securities at fair value, but do not report changes in fair value as part of net income until after they sell the security.
Interest on available-for-sale securities is recorded when earned. Unrealized holding gains and losses on available-for-sale securities are recognized as other comprehensive income and as a separate component of stockholders' equity. (p. 218).

balance sheet Financial statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and stockholders' equity (p. 214).

cash debt coverage ratio

Measure of solvency that indicates a company's 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. 234).


contra account Material events with an uncertain future. The uncertainty can involve a possible gain (gain contingency) or possible loss (loss contingency) that will ultimately be resolved when one or more future events occur or fail to occur. Typical gain contingencies are tax operating loss carryforwards or company litigation against another party. Typical loss contingencies relate to litigation, environmental issues, possible tax assessments, or government investigations. (p.
An account that reduces either an asset, liability, or owners' equity account. Examples include Accumulated Depreciation—Equipment and Discount on Bonds Payable. Use of contra accounts enables readers of financial statements to see the original cost of the asset, liability, or owners' equity account as well as the changes in the account to date. (p. 241).









current assets Cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer. Companies present current assets in the balance sheet in order of liquidity. (p. 217).

current cash debt coverage ratio

Measure of liquidity that indicates a company's ability to pay its short-term debts. Computed as cash provided by operating activities divided by average current liabilities. (p. 233).

current liabilities The obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities. This concept includes payables resulting from the acquisition of goods and services; (2) collections received in advance for the delivery of goods or performance of services; and (3) other liabilities whose liquidation will take place within the operating cycle. (p. 222).

financial flexibility The ability of a company to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities. A company's liquidity and solvency affect its financial flexibility. (p. 215).

financial instruments Assets consisting of cash, accounts receivable, an ownership interest, or a contractual right to receive or obligation to deliver cash or another financial instrument. (p. 238).

financing activities Cash flow activities that include (1) obtaining