Key Financial Terms and Accounting Principles
Net Income
Net Income is the residual amount of earnings after all expenses have been deducted from sales. In short, gross income is an intermediate earnings figure before all expenses are included, and net income is the final amount of profit or loss after all expenses are included.
Net Sales Calculation
Net sales is total revenue, less the cost of sales returns, allowances, and discounts. This is the primary sales figure reviewed by analysts when they examine the income statement of a business.
Statement of Cash Flows
A cash flow statement, also known as a statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.
Assets
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value or benefit the firm’s operations.
Liabilities
A liability is defined as a company’s legal financial debts or obligations that arise during the course of business operations.
Treasury Stock
Treasury stock, or reacquired stock, is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market.
Accounting Equation
Assets = Shareholders’ Equity + Liabilities
Cost of Goods Sold
Cost of Goods Sold is the total cost incurred for the goods sold during a specific accounting period.
Unearned Revenue
Unearned Revenue is a liability arising when customers pay cash in advance for services a business will perform in the future.
LCM (Lower of Cost or Market)
Lower of Cost or Market, often abbreviated as LCM, is an accounting method for valuing inventory. It assigns a value to inventory at the lesser of the market replacement cost or the amount it was recorded at when it was initially purchased.
Bank Reconciliation
Bank Reconciliation is a schedule that identifies and explains differences between the cash balance reported by the bank and the cash balance in the company’s accounting records.
Depletion
Depletion is the removal of natural resources from the land; the depletion costs of the natural resources are systematically transferred to expense as the resources are removed.
Bond Premium
Bond Premium is the difference between the selling price and the face amount of a bond sold for more than the face amount.
Debit Plan
A Debit Plan is an entry on the left side of an account; it increases asset accounts or decreases liability and equity accounts.
Assets
Assets are economic resources used to produce revenue that are expected to provide a future benefit to the business.
Authorized Stock
Authorized Stock is the number of shares of stock a corporation has state approval to issue.
Posting
Posting is copying transaction data from journals to ledger accounts.
Trial Balance
A Trial Balance is a schedule listing the balances of all ledger accounts; it verifies the mathematical accuracy of the accounting records and provides a convenient reference of current account balances.
Natural Resources
Natural Resources are wasting assets originally attached to land such as mineral deposits, oil and gas reserves, and reserves of timber, mines, and quarries; the land value declines as the resources are removed.
Fiscal Year
The Fiscal Year is the annual time period for which a company provides financial statements.
FIFO (First-In, First-Out)
FIFO is an inventory cost flow method in which the cost of goods sold is computed as if the earliest items purchased are the first items sold.
Accrual Accounting
Accrual Accounting is an accounting system that recognizes expenses or revenues when they occur, regardless of when cash is exchanged.
Stock Options
Stock Options are sold by one party to another, that give the option buyer the right, but not the obligation, to buy or sell a stock at an agreed-upon price within a certain period of time.