Financial reporting system A subsystem
of accounting that produces financial
statements and other reports for external
stakeholders. (p. 154)
Financial statements Financial reports
that summarize the effects of events on
a business. (p. 14)
Financing activities Business activities
that involve obtaining funds to begin
and operate a business. (p. 10)
Finished goods inventory The cost of
finished products on hand that have not
been sold. (p. 266)
First-in, first-out (fifo) method A method
of inventory costing based on the
assumption that the costs of merchan-
dise sold should be charged against
revenue in the order in which the costs
were incurred. (p. 269)
Fiscal year The annual accounting
period adopted by a business. (p. 168)
Fixed asset impairments A condition
when the fair value of a fixed asset falls
below its book value and is not expected
to recover. (p. 538)
Fixed asset turnover ratio The number
of dollars of sales that are generated
from each dollar of average fixed assets
during the year, computed by dividing
the net sales by the average net fixed
assets. (pp. 418, 645)
Fixed assets Long-lived or relatively per-
manent tangible assets that are used in
the normal business operations; some-
times called plant assets. (pp. 114, 400)
FOB (free on board) destination Freight
terms in which the seller pays the trans-
portation costs from the shipping point
to the final destination. (p. 226)
FOB (free on board) shipping point
Freight terms in which the buyer pays
the transportation costs from the ship-
ping point to the final destination.
(p. 226)
Free cash flow The amount of operat-
ing cash flow remaining after replacing
current productive capacity and main-
taining current dividends. (p. 597)
Fringe benefits Benefits provided to
employees in addition to wages and
salaries. (p. 446)
General ledger The group of accounts
of a business. (p. 160)
Generally accepted accounting principles
(GAAP) Rules for how financial state-
ments should be prepared. (p. 20)Going concern concept A concept of
accounting that assumes a business will
continue operating for an indefinite
period of time. (p. 22)
Goodwill An intangible asset of a busi-
ness that is created from such favorable
factors as location, product quality, rep-
utation, and managerial skill, as verified
from a merger transaction. (p. 414)
Gross pay The total earnings of an
employee for a payroll period. (p. 444)
Gross profit Sales minus the cost of
merchandise sold. (pp. 26, 212)
Held-to-maturity securities Investments
in bonds or other debt securities that
management intends to hold to their
maturity. (p. 549)
Horizontal analysis A method of
analyzing financial performance that
computes percentage increases and de-
creases in related items in comparative
financial statements. (pp. 26, 632)
Income from operations (operating in-
come) The excess of gross profit over
total operating expenses. (p. 217)
Income statement A summary of the
revenue and expenses for a specific
period of time, such as a month or a
year. (p. 14)
Indirect method A method of reporting
the cash flows from operating activities
as the net income from operations
adjusted for all deferrals of past cash
receipts and payments and all accruals
of expected future cash receipts and
payments. (pp. 234, 581)
Intangible assets Long-lived assets that
are useful in the operations of a business,
are not held for sale, and are without
physical qualities; examples are patent
or copyright rights. (pp. 12, 114, 412)
Interest The cost of borrowing or lend-
ing money. (p. 447)
Interest payable A liability to pay inter-
est on a due date. (p. 11)
Internal controls The policies and
procedures used to safeguard assets,
ensure accurate business information,
and ensure compliance with laws and
regulations. (p. 306)
Inventory ledger The subsidiary ledger
that shows the amount of each type of
inventory. (p. 268)
Inventory shrinkage The amount by
which the merchandise for sale, as indi-
cated by the balance of the merchandiseinventory account, is larger than the
total amount of merchandise counted
during the physical inventory. (p. 230)
Inventory turnover The relationship
between the volume of goods sold and
inventory, computed by dividing the cost
of goods sold by the average inventory.
(pp. 282, 643)
Investing activities Business activities
that involve obtaining the necessary
resources to start and operate the
business. (p. 12)
Investments The balance sheet caption
used to report long-term investments in
stocks not intended as a source of cash
in the normal operations of the business.
(p. 546)
Invoice The bill that the seller sends to
the buyer. (p. 223)
Journal The record in which the effects
of transactions are recorded in chrono-
logical order. (p. 157)
Journal entry The transaction record
entered in the journal. (p. 157)
Journalizing The process of recording
transactions in the journal. (p. 157)
Last-in, first-out (lifo) method A method
of inventory costing based on the as-
sumption that the most recent merchan-
dise inventory costs should be charged
against revenue. (p. 269)
Leverage The amount of debt used by
the firm to finance its assets; causes the
rate earned on stockholders’ equity to
vary from the rate earned on total assets
because the amount earned on assets
acquired through the use of funds pro-
vided by creditors varies from the interest
paid to these creditors. (pp. 465, 638)
Leverage formula A formula that states
the rate earned on stockholders’ equity
as the product of the rate earned on
total assets and the ratio of the average
total assets divided by average stock-
holders’ equity, or leverage. (p. 638)
Liabilities The rights of creditors that
represent a legal obligation to repay an
amount borrowed according to terms of
the borrowing agreement. (pp. 11, 114)
Lifo conformity rule A financial report-
ing rule requiring a firm that elects to
use lifo inventory valuation for tax pur-
poses to also use lifo for external finan-
cial reporting. (p. 278)
Lifo reserve A required disclosure for
lifo firms, showing the difference betweenG-4 Glossary