Glossary G-3Credit terms Terms for payment on ac-
count by the buyer to the seller. (p. 223)
Creditor A lender of money, such as a
bank or bondholder. (p. 442)
Credits Amounts entered on the right
side of an account. (p. 155)
Cumulative preferred stock A class of
preferred stock that has a right to receive
regular dividends that have been passed
(not declared) before any common stock
dividends are paid. (p. 498)
Current assets Cash and other assets
that are expected to be converted to
cash or sold or used up within one year
or less, through the normal operations
of the business. (p. 114)
Current liabilities Liabilities that will be
due within a short time (usually one
year or less) and that are to be paid
out of current assets. (p. 114)
Current ratio A financial ratio that is
computed by dividing current assets by
current liabilities. (pp. 464, 647)
Debenture bonds Bonds issued on the
basis of the general credit of the corpo-
ration. (p. 448)
Debit memorandum A form used by a
buyer to inform the seller of the amount
the buyer proposes to debit to the
account payable due the seller. (p. 225)
Debits Amounts entered on the left side
of an account. (p. 155)
Debtor A borrower of money. (p. 442)
Declining-balance method A method
of depreciation that provides periodic
depreciation expense based on the
declining book value of a fixed asset
over its estimated life. (p. 407)
Deferrals The delayed recording of an
expense or revenue. (p. 105)
Deferred expense Items that are initially
recorded as assets but are expected to
become expenses over time or through
the normal operations of the business;
sometimes called prepaid expenses.
(p. 101, 459)
Deferred revenues Items that are initially
recorded as liabilities but are expected
to become revenues over time or through
the normal operations of the business;
sometimes called unearned revenues.
(pp. 106, 459)
Depreciation The systematic periodic
transfer of the cost of a fixed asset to
an expense account during its expected
useful life. (pp. 108, 404)
Direct method A method of reporting
the cash flows from operating activities
as the difference between the operating
cash receipts and the operating cash
payments. (pp. 234, 580)
Direct write-off method The method of
accounting for uncollectible accounts
that recognizes the expense only when
accounts are judged to be worthless.
(p. 357)
Discontinued operations Operations of
a major line of business or component
for a company, such as a division, a
department, or a certain class of cus-
tomer, that have been disposed of.
(p. 541)
Discount The interest deducted from
the maturity value of a note or the
excess of the face amount of bonds
over their issue price. (p. 443)
Discount rate The rate used in comput-
ing the interest to be deducted from the
maturity value of a note. (p. 443)
Discounting The process of converting
a future amount into a present value.
(p. 449)
Dishonored note receivable A note that
the maker fails to pay on the due date.
(p. 367)
Dividend payout ratio A ratio computed
by dividing the annual cash dividends
(per share) by the annual net income
(per share); indicates dividend safety.
(p. 511)
Dividend yield A ratio computed by
dividing the annual dividends paid per
share of common stock by the market
price per share at a specific date; indi-
cates the rate of return to stockholders
in terms of cash dividend distributions.
(pp. 510, 651)
Dividends Distributions of earnings of a
corporation to stockholders. (p. 12)
Double-entry accounting system A system
of accounting for recording transactions,
based on recording increases and de-
creases in accounts so that debits equal
credits and Assets LiabilitiesStock-
holders’ Equity. (p. 157)
DuPont formula A formula that states
that the rate earned on total assets is the
product of two factors, the profit margin
and the total asset turnover. (p. 640)
Earnings before interest, taxes, depreci-
ation, and amortization (EBITDA) A type
of pro forma computation used by
financial analysts as a rough estimateof operating cash flows that are avail-
able to pay interest and other fixed
charges. (p. 173)
Earnings per common share (EPS) The
profitability ratio of net income avail-
able to common shareholders to the
number of common shares outstanding.
(pp. 542, 650)
Effective interest rate method A method
of amortizing a bond discount or pre-
mium using present value techniques.
(p. 455)
Electronic funds transfer (EFT) A system
in which computers rather than paper
(money, checks, etc.) are used to effect
cash transactions. (p. 317)
Elements of internal control The control
environment, risk assessment, control
activities, information and communica-
tion, and monitoring. (p. 309)
Employee fraud The intentional act of
deceiving an employer for personal
gain. (p. 309)
Equity method A method of accounting
for an investment in common stock by
which the investment account is adjusted
for the investor’s share of periodic net
income and cash dividends of the
investee. (p. 546)
Equity securities The common and pre-
ferred stock of a firm. (p. 544)
Expenses Costs used to earn revenues.
(p. 12)
Extraordinary items Events and transac-
tions that (1) are significantly different
(unusual) from the typical or the normal
operating activities of a business and
(2) occur infrequently. (p. 541)
FICA tax Federal Insurance Contribu-
tions Act tax used to finance federal
programs for old-age and disability
benefits (social security) and health
insurance for the aged (Medicare).
(p. 444)
Financial Accounting Standards Board
(FASB) The authoritative body that has
the primary responsibility for developing
accounting principles. (p. 21)
Financial accounting system A system
that includes (1) a set of rules for deter-
mining what, when, and the amount
that should be recorded for economic
events, (2) a framework for facilitating
preparation of financial statements, and
(3) one or more controls to determine
whether errors may have arisen in the
recording process. (p. 54)