Financing Obtaining resources from (a) owners and providing them with a
activities return on and a return of their investment and (b) creditors and
repaying amounts borrowed (or otherwise settling the obligation).
See statement of cash ?ows.
Dividends A distribution of assets generated from earnings to owners of a
corporation. The firm may distribute cash (cash dividend), stock
(stock dividend), property, or other securities (dividend in kind).
Dividends, except stock dividends, become a legal liability of the
corporation when the corporation’s board declares them. Hence,
the owner of stock ordinarily recognizes revenue when the board of
the corporation declares the dividend, except for stock dividends.
See also liquidating dividend and stock dividend.
Investing activities Acquiring and selling securities or productive assets expected to
produce revenue over several periods.
Operating For purposes of the statement of cash flows, all transactions and
activities events that are neither financing activities nor investing activities.
Annual report to A report prepared once a year for shareholders and other
shareholders interested parties. It includes a balance sheet, an income
statement, a statement of cash flows, a reconciliation of changes in
owners’ equity accounts, a summary of significant accounting
principles, other explanatory notes, the auditor’s report, and
comments from management about the year’s events. See 10-K
and financial statements.
Management A discussion of management’s views of the company’s
Discussion and performance; required by the SEC to be included in the 10-K and in
Analysis the annual report to shareholders. The information typically
contains discussion of such items as liquidity, results of operations,
segments, and the effects of inflation.
Balance sheet Statement of financial position that shows Total Assets = Total
Liabilities + Owners’
Equity The balance sheet usually classifies Total Assets as (1) current
assets, (2) investments, (3) property, plant, and equipment, or (4)
intangible assets. The balance sheet accounts composing Total
Liabilities usually appear under the headings Current Liabilities and
Assets SFAC No. 6 defines assets as “probable future economic benefits
obtained or controlled by a particular entity as a result of past
transactions. . . . An asset has three essential characteristics: (a) it
embodies a probable future benefit that involves a capacity, singly
or in combination with other assets, to contribute directly or
indirectly to future net cash inflows, (b) a particular entity can obtain
the benefit and control others’ access to it, and (c) the transaction
or other event giving rise to the entity’s right to or control of the
benefit has already occurred.” A footnote points out that “probable”
means that which we can reasonably expect or believe but that is
not certain or proved. You may understand condition (c) better if
you think of it as requiring that a future benefit cannot be an asset if
it arises from an executory contract, a mere exchange of promises.
Receiving a purchase order from a customer provides a future
benefit, but it is an executory contract, so the order cannot be an
asset. An asset may be tangible or intangible, short-term (current)
or long-term (noncurrent).
Liabilities An obligation to pay a definite (or reasonably definite) amount at a
definite (or reasonably definite) time in return for a past or current
benefit (that is, the obligation arises from a transaction that is not
an executory contract); a probable future sacrifice of economic
benefits arising from present obligations of a particular entity to
transfer assets or to provide services to other entities in the future
as a result of past transactions or events. SFAC No. 6 says that
“probable” refers to that which we can reasonably expect or believe
but that is neither certain nor proved. A liability has three essential
characteristics: (1) the obligation to transfer assets or services has
a specified or knowable date, (2) the entity has little or no discretion
to avoid the transfer, and (3) the event causing the obligation has
already happened, that is, it is not executory.
Shareholders’ Proprietorship or owners’ equity of a corporation. Because stock
equity means inventory in Australia, the UK, and Canada, their writers use
the term “shareholders’ equity” rather than the term “stockholders’
Contributed Name for the owners’ equity account that represents amounts paid
capital in, usually in cash, by owners; the sum of the balances in capital
stock accounts plus capital contributed in excess of par (or stated)
value accounts. Contrast with donatedc apital.
Retained earnings Net income over the life of a corporation less all dividends
(including capitalization through stock dividends); owners' equity
less contributed capital.
Historical Showing balance sheet amounts at acquisition cost, sometimes
valuation reduced for accumulated amortization; sometimes reduced to lower
of cost or market.
Income statement The statement of revenues, expenses, gains, and losses for the
period, ending with net income for the period. Accountants usually
show the earnings-per-share amount on the income statement; the
reconciliation of beginning and ending balances of retained
earnings may also appear in a combined statement of income and
retained earnings. See income from continuing operations, income
from discontinued operations, extraordinary items, multiple-step,
Net income, The excess of all revenues and gains for a period over all
earnings expenses and losses of the period. The FASB is proposing to
discontinue use of this term and substitute earnings. See
Revenues The owners’ equity increase accompanying the net assets increase
caused by selling goods or rendering services; in short, a service
rendered; sales of products, merchandise, and services and
earnings from interest, dividends, rents, and the like. Measure
revenue as the expected net present value of the net assets the
firm will receive. Do not confuse with receipt of funds, which may
occur before, when, or after revenue is recognized. Contrast with
gain and income. See also holding gain. Some writers use the term
gross income synonymously with revenue; avoid such usage.
Expenses As a noun, a decrease in owners’ equity accompanying the
decrease in net assets caused by selling goods or rendering
services or by the passage of time; a “gone” (net) asset; an expired
cost. Measure expense as the cost of the (net) assets used. Do not
confuse with expenditure or disbursement, which may occur
before, when, or after the firm recognizes the related expense. Use
the word “cost” to refer to an item that still has service potential and
is an asset. Use the word “expense” after the firm has used the
asset’s service potential. As a verb, “expense” means to designate
an expenditure—past, current, or future—as a current expense.
Net loss The excess of all expenses and losses for a period over all
revenues and gains of the period; negative net income.
Statement of cash A schedule of cash receipts and payments, classified by investing, flows financing, and operating activities; required by the FASB for all for-
profit companies. Companies may report operating activities with
either the direct method (which shows only receipts and payments
of cash) or the indirect method (which starts with net income and
shows adjustments for revenues not currently producing cash and
for expenses not currently using cash). “Cash” includes cash
equivalents such as Treasury bills, commercial paper, and
marketable securities held as current assets. This is sometimes
called the “funds statement.” Before 1987, the FASB required the
presentation of a similar statement called the statement of changes
in financial position, which tended to emphasize working capital,
Unqualified, See auditor’s report.
Disclaimer of An auditor’s report stating that the auditor cannot give an opinion opinion on the financial statements. Usually results from material
restrictions on the scope of the audit or from material uncertainties,
which the firm has been unable to resolve by the time of the audit,
about the accounts.
Adverse opinion An auditor’s report stating that the financial statements are not fair
or are not in accord with GAAP.
Securities and An agency authorized by the U.S. Congress to regulate, among Exchange other things, the financial reporting practices of most public Commission corporations. The SEC has indicated that it will usually allow the
(SEC) FASB to set accounting principles, but it often requires more
disclosure than the FASB requires. The SEC states its accounting
requirements in its Accounting Series Releases (ASR), Financial
Reporting Releases, Accounting and Auditing Enforcement
Releases, Staff Accounting Bulletins (these are, strictly speaking,
interpretations by the accounting staff, not rules of the
commissioners themselves), and Regulations S-X. See also
registration statement, 10-K, and 20-F.
secret reserve Hidden reserve.
Financial An independent board responsible, since 1973, for establishing
Accounting generally accepted accounting principles. Its official Standards Board pronouncements are Statements of Financial Accounting Concepts (FASB) (SFAC), Statements of Financial Accounting Standards (SFAS),