248 Accounting: Business Reporting for Decision Making
Cash accounting Transactions are recorded in the period the cash is received or paid.
Comparative information Presentation of the financial statements of an entity for multiple years.
Contra account An account that is offset against another account.
Cost of goods manufactured The total cost of materials, labour and overhead used in manufacturing
the goods.
Cost of sales Cost of inventory sold during the period. Recall the discussion of the periodic and
perpetual inventory system in chapter 5. In a perpetual inventory system, continuous records of
inventory on hand and the cost of sales are maintained. In a periodic inventory system, where
continuous records of inventory on hand and cost of sales are not maintained, the cost of sales is
determined by the opening inventory balance plus purchases less closing inventory balance. To
determine the closing inventory balance in a periodic system, a stocktake must be performed.Depreciation Allocation of the depreciable amount of a depreciable asset over its estimated useful life.
Diminishing balance depreciation Depreciation method that results in decreasing depreciation expense
each reporting period over the asset’s useful life. Also referred to as reducing balance depreciation.
Distribution to owners The resources (e.g. dividends) distributed to owners.
Earnings before interest and taxation (EBIT) Profit before net interest and taxation expense.
Earnings before interest, tax, depreciation and amortisation (EBITDA) The profit before interest,
taxation and depreciation/amortisation expense.
Earnings management Managers’ use of accounting discretion via accounting policy choices and/or
estimates to report a desired level of profit.
Expenses Decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants.
Gross profit Excess of net sales revenue over the cost of sales.
Impairment When an asset’s carrying amount exceeds its recoverable amount.
Income Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets, or decreases of liabilities that result in increases in equity, other than those
relating to contributions from equity participants.Income received in advance Amounts received from customers and recognised as liabilities before
the services are performed or the goods are provided.
Integrated reporting Reporting on the value created by the entity’s strategy, governance, performance
and prospects.
Material items Items that are likely to influence a financial statement user’s decision making.
Net finance costs Interest income less interest expense (including finance lease charges).
Other comprehensive income All changes in equity during the reporting period other than profit or
loss and those resulting from transactions with owners as owners.
Prepaid expenses (prepayments) Amounts paid in cash and recorded as assets until the economic
benefits are used or consumed.
Profit or loss Income less expenses for a reporting period.
Pro forma earnings Earnings that are not in accordance with GAAP earnings.
Recoverable amount Higher of an asset’s expected fair value (less costs of disposal) and value in use.
Recognition Recording items in the financial statements with a monetary value assigned to them.
Reporting period (accounting period) Period of time to which the financial statements relate.
Retained earnings (retained profits or accumulated profits) Cumulative profits made by the entity
that have not been distributed as dividends or transferred to reserve accounts.
Revenue Income arising in the ordinary course of an entity’s activities.
Statement of changes in equity Statement showing the change in an entity’s equity between two
reporting periods.
Statement of comprehensive income Statement showing all items of income and expense during the
reporting period, including those items recognised in determining profit or loss as well as items of
other comprehensive income taken directly to equity.