Accounting Ch 3

net realizable value

Net realizable value is the net cash amount expected from the sale of an item, usually equal to the selling price of the item less the cost to complete and sell it.

objectivity

Objectivity is a principle of financial accounting measurement stating that the values of transactions and the assets and liabilities created by them must be verifiable, i.e., backed by documents and prepared in a systematic and reasonable manner.

present value

Present value is a technique used to place a value, as of the present day, on a set of future cash flows. It is computed by discounting future cash flows at an interest rate that reflects a company's cost of capital.

replacement cost

Replacement cost is the current price a company would have to pay in the input market to replace an existing asset while maintaining operations at the present level.

original cost

See historical cost. Historical cost is the dollar amount incurred to acquire an asset (investment) or bring it to sellable (inventory) or serviceable (long-lived asset) condition. Historical cost is also referred to as original cost or cost.

face value

See maturity value. The maturity value is the dollar amount written on the face of the note or bond certificate that is paid to the holder at the maturity date. Face value and par value are terms often used interchangeably with maturity value.

output market

The output market is the market where an entity sells the outputs from its operations. Fair market value, market price, and net realizable value are all output market values.

lower-of-cost-or-market rule

Lower-of-cost-or-market is a rule applied to accounting for inventories, which states that the balance sheet value of inventory will be its historical cost or its market value, whichever is lower.

fair market value

Fair market value is the dollar amount at which an item can be sold - exchanged for cash.

purchasing power

Purchasing power is the amount of goods and services a monetary amount can buy at a given point in time. See inflation.

materiality

Materiality is an exception to the principles of financial accounting stating that only those transactions dealing with dollar amounts large enough to make a difference to financial statement users need be accounted for in a manner consistent with GAAP. The dollar amounts of some transactions are so small that the method of accounting has virtually no impact on the decisions based upon information in the financial statements. Such transactions are referred to as immaterial, and management is allowed to account for them as expediently as possible.

going concern

A going concern is an entity that is expected to exist into the foreseeable future. No financial problems indicating financial failure over the planning horizon are apparent. Going concern is an assumption that underlies the financial statements, and auditors are expected to qualify their audit reports if there is doubt about the ability of the audited company to continue as a going concern.

conservatism

Conservatism is an exception to the principles of accounting measurement stating that when in doubt, financial statements should understate assets, overstate liabilities, accelerate the recognition of losses, and delay the recognition of gains.

historical cost

Historical cost is the dollar amount incurred to acquire an asset (investment) or bring it to sellable (inventory) or serviceable (long-lived asset) condition. Historical cost is also referred to as original cost or cost.

consistency

Consistency is a principle of accounting measurement stating that, although there is considerable choice among accounting methods, companies should choose a set of methods and use them from one period to the next. Consistency helps financial statement users to make useful comparisons across time.

fiscal year

Fiscal years end on dates other than December 31. Most companies report on a calendar-year (December 31) basis (e.g. seasonality), but for various reasons, some companies report on other 365-day cycles, called fiscal years.

revenue recognition

Revenue recognition is a principle of accounting measurement that determines when revenue from the sale of a good or the provision of a service is entered into the financial statements, Revenue recognition is a critical question in the matching process because the expenses incurred to generate revenues should not be reflected on the income statement until the revenues arc recognized. The sale of a good or provision of a service normally involves a series of steps—including ordering the good or service, producing it, transferring it to the customer, and receiving payment. The principle of revenue recognition helps to determine at which of these steps the revenue should be recorded in the books.

economic entity assumption

The economic entity assumption states that the financial statements refer to entities that are distinct from both their owners and all other economic entities. This assumption is important in determining the methods to account for consolidated financial statements, investments in equity securities, and business segments.

fiscal period assumption

The fiscal period assumption states that the life of an economic entity can be divided into fiscal periods and that performance can be measured over those periods. This assumption allows the measurement of income for a given period of time (quarterly or annually) and raises questions about how the benefits and costs of a company should be allocated across periods for financial accounting purposes.

input market

The input market is where an entity purchases the inputs for its operations. Historical cost, which is used extensively on the balance sheet, represents the cost of a company's inputs (e.g., inventory and long-lived assets) when they were acquired previously. Re-placement cost, which is used selectively on the balance sheet (e.g., lower of cost or market applied to inventory), represents the current cost of a company's inputs.

matching principle

The matching principle is a measurement principle of financial accounting stating that performance is measured by matching efforts against benefits in the time period in which the benefits are realized. Net income on the income statement is the result of matching expenses against revenues in the time period when the revenues are realized. The matching principle. is applied by first recognizing revenues and then matching against those revenues the expenses required to generate them.

stable dollar assumption

The stable dollar assumption states that the value of the monetary unit used to measure a company's performance and financial condition is stable across time. That is, the inflation rate is assumed to be zero. This assumption allows mathematical operations (addition, subtraction, multiplication, and division) to be performed on account values that are established at different points in time.

valuation base

Valuation base refers to the values (e.g., historical cost, replacement cost, fair market value, net realizable value. present value) used to determine the dollar amount of an entity's assets and liabilities on the balance sheet.