Definition of Statement of Financial Accounting Standards No. 52
Statement of Financial Accounting Standards No. 52
This is the currency translation standard currently
used by U.S. firms. It mandates the use of the current rate method. See: statement of financial accounting
standards No. 8.
The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.
Earnings of a firm as reported on its income statement.
Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
The ease and quickness with which assets can be converted to cash.
The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.
Sources of funds internally provided from operations that alter a company's
cash flow position: depreciation, deferred taxes, other sources, and capital expenditures.
The Association for Investment Management and Research (AIMR)'s Performance Presentation standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
Presentation standards (AIMR-PPS(TM)) for portfolio performance presentations.
An annual statement filed by a life insurance company in each state where it does
business in compliance with that state's regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting company.
The application of financial principals within a corporation to create and
maintain value through decision making and proper resource management.
financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.
The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.
Highlights the fact that return on assets (ROA) can be expressed in terms
of the profit margin and asset turnover.
The U.S. accounting standard which was replaced by FASB No. 8. U.S. companies are required
to translate foreign accounts by the current rate and report the changes from currency fluctuations in a
cumulative translation adjustment account in the equity section of the balance sheet.
Also called securities analysts and investment analysts, professionals who analyze
financial statements, interview corporate executives, and attend trade shows, in order to write reports
recommending either purchasing, selling, or holding various stocks.
Claims on real assets.
The management of a firm's costs and expenses in order to control them in relation to
Events preceding and including bankruptcy, such as violation of loan contracts.
Financial distress costs
Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).
Combining or dividing existing instruments to create new financial products.
A contract entered into now that provides for the delivery of a specified asset in exchange
for the selling price at some specified future date.
Institutions that provide the market function of matching borrowers and lenders or
Long-term, non-cancelable lease.
Use of debt to increase the expected return on equity. financial leverage is measured by
the ratio of debt to debt plus equity.
Financial leverage clientele
A group of investors who have a preference for investing in firms that adhere to
a particular financial leverage policy.
Financial leverage ratios
Related: capitalization ratios.
An organized institutional structure or mechanism for creating and exchanging financial assets.
Objectives of a financial nature that the firm will strive to accomplish during the period
covered by its financial plan.
A financial blueprint for the financial future of a firm.
The process of evaluating the investing and financing options available to a firm. It
includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in
the form of a financial plan, and then comparing future performance against that plan.
That portion of the media devoted to reporting financial news.
The result of dividing one financial statement item by another. Ratios help analysts interpret
financial statements by focussing on specific relationships.
The risk that the cash flow of an issuer will not be adequate to meet its financial obligations.
Also referred to as the additional risk that a firm's stockholder bears when the firm utilizes debt and equity.
Generally Accepted Accounting Principals (GAAP)
A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
Income statement (statement of operations)
A statement showing the revenues, expenses, and income (the
difference between revenues and expenses) of a corporation over some period of time.
London International Financial Futures Exchange (LIFFE)
A London exchange where Eurodollar futures
as well as futures-style options are traded.
Long-term financial plan
financial plan covering two or more years of future operations.
London International Financial Futures Exchange (LIFFE)
London exchange where Eurodollar futures as well as futures-style options are traded.
Include such things as freight, insurance, passenger services, and travel.
Notes to the financial statements
A detailed set of notes immediately following the financial statements in
an annual report that explain and expand on the information in the financial statements.
A statement published by an issuer of a new municipal security describing itself and the issue
Perfectly competitive financial markets
Markets in which no trader has the power to change the price of
goods or services. Perfect capital markets are characterized by the following conditions: 1) trading is costless,
and access to the financial markets is free, 2) information about borrowing and lending opportunities is freely
available, 3) there are many traders, and no single trader can have a significant impact on market prices.
Pro forma financial statements
financial statements as adjusted to reflect a projected or planned transaction.
Pro forma statement
A financial statement showing the forecast or projected operating results and balance
sheet, as in pro forma income statements, balance sheets, and statements of cash flows.
Method of accounting for a merger in which the acquirer is treated as having purchased
the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair
market values, the difference between the purchase price and the net assets acquired being attributed to goodwill.
A legal document that is filed with the SEC to register securities for public offering.
Regulatory accounting procedures
accounting principals required by the FHLB that allow S&Ls to elect
annually to defer gains and losses on the sale of assets and amortize these deferrals over the average life of the
Short-term financial plan
A financial plan that covers the coming fiscal year.
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
A dedicated computer network to support funds transfer messages internationally between over 900 member banks worldwide.
Billing method in which the sales for a period such as a month (for which a customer also
receives invoices) are collected into a single statement and the customer must pay all of the invoices
represented on the statement.
Statement of cash flows
A financial statement showing a firm's cash receipts and cash payments during a
A method of cash budgeting that is organized along the lines of the statement of cash flows.
Statement of Financial Accounting Standards No. 8
This is a currency translation standard previously in
use by U.S. accounting firms. See: statement of accounting standards No. 52.
A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.
An accounting statement that summarizes information about a company in the following format:
– Cost of goods sold
– Operating expenses
Earnings before income tax
– Income tax
= Net income or (Net loss)
Formally called a “consolidated earnings statement,” it covers a period of time such as a quarter or a year.
A collection of systems and processes used to record, report and interpret business transactions.
The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.
The period of time for which financial statements are produced – see also financial year.
Accounting rate of return (ARR)
A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.
A set of accounts that summarize the transactions of a business that have been recorded on source documents.
A method of accounting in which profit is calculated as the difference between income when it is earned and expenses when they are incurred.
A method of accounting in which profit is calculated as the difference between income
when it is received and expenses when they are paid.
Cash Flow statement
A financial report that shows the movement in cash for a business during an accounting period.
The production of financial statements, primarily for those interested parties who are external to the business.
Financial reports or statements
The Profit and Loss account, Balance Sheet and Cash Flow statement of a business.
The accounting period adopted by a business for the production of its financial statements.
Finished goods Inventory that is ready for sale, either having been purchased as such or the result of a conversion from raw materials through a manufacturing process.
The production of financial and non-financial information used in planning for the future; making decisions about products, services, prices and what costs to incur; and ensuring that plans are implemented and achieved.
Strategic management accounting
The provision and analysis of management accounting data about a business and its competitors, which is of use in the development and monitoring of strategy (Simmonds).
The formula Assets = Liabilities + Equity.
One of the basic financial statements; it lists the revenue and expense accounts of the company.
The Income statement is prepared for a given period of time.
Statement of Cash Flows
One of the basic financial statements; it lists the cash inflows and cash outflows of the company, grouped into the categories of operating activities, financing activities, and investing activities. The statement of Cash Flows is prepared for a specified period of time.
Statement Retained Earnings
One of the basic financial statements; it takes the beginning balance of retained earnings and adds net income, then subtracts dividends. The statement of Retained Earnings is prepared for a specified period of time.
A broad, all-inclusive term that refers to the methods and procedures
of financial record keeping by a business (or any entity); it also
refers to the main functions and purposes of record keeping, which are
to assist in the operations of the entity, to provide necessary information
to managers for making decisions and exercising control, to measure
profit, to comply with income and other tax laws, and to prepare financial
An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.
Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.
statement of cash flows
One of the three primary financial statements
that a business includes in the periodic financial reports to its outside
shareowners and lenders. This financial statement summarizes the business’s
cash inflows and outflows for the period according to a threefold
classification: (1) cash flow from operating activities (cash flow from
profit), (2) cash flow from investing activities, and (3) cash flow from
financing activities. Frankly, the typical statement of cash flows is difficult
to read and decipher; it includes too many lines of information and
is fairly technical compared with the typical balance sheet and income
See accrual-basis accounting.
statement of financial condition
See balance sheet.
The equity (ownership) capital of a business can serve
as the basis for securing debt capital (borrowing money). In this way, a
business increases the total capital available to invest in its assets and
can make more sales and more profit. The strategy is to earn operating
profit, or earnings before interest and income tax (EBIT), on the capital
supplied from debt that is more than the interest paid on the debt capital.
A financial leverage gain equals the EBIT earned on debt capital
minus the interest on the debt. A financial leverage gain augments earnings
on equity capital. A business must earn a rate of return on its assets
(ROA) that is greater than the interest rate on its debt to make a financial
leverage gain. If the spread between its ROA and interest rate is unfavorable,
a business suffers a financial leverage loss.
financial reports and statements
financial means having to do with
money and economic wealth. statement means a formal presentation.
financial reports are printed and a copy is sent to each owner and each
major lender of the business. Most public corporations make their financial
reports available on a web site, so all or part of the financial report
can be downloaded by anyone. Businesses prepare three primary financial
statements: the statement of financial condition, or balance sheet;
the statement of cash flows; and the income statement. These three key
financial statements constitute the core of the periodic financial reports
that are distributed outside a business to its shareowners and lenders.
financial reports also include footnotes to the financial statements and
much other information. financial statements are prepared according to
generally accepted accounting principles (GAAP), which are the authoritative
rules that govern the measurement of net income and the reporting
of profit-making activities, financial condition, and cash flows.
Internal financial statements, although based on the same profit
accounting methods, report more information to managers for decision
making and control. Sometimes, financial statements are called simply
generally accepted accounting principles (GAAP)
This important term
refers to the body of authoritative rules for measuring profit and preparing
financial statements that are included in financial reports by a business
to its outside shareowners and lenders. The development of these
guidelines has been evolving for more than 70 years. Congress passed a
law in 1934 that bestowed primary jurisdiction over financial reporting
by publicly owned businesses to the Securities and Exchange Commission
(SEC). But the SEC has largely left the development of GAAP to the
private sector. Presently, the financial accounting standards Board is
the primary (but not the only) authoritative body that makes pronouncements
on GAAP. One caution: GAAP are like a movable feast. New rules
are issued fairly frequently, old rules are amended from time to time,
and some rules established years ago are discarded on occasion. Professional
accountants have a heck of time keeping up with GAAP, that’s for
sure. Also, new GAAP rules sometimes have the effect of closing the barn
door after the horse has left. accounting abuses occur, and only then,
after the damage has been done, are new rules issued to prevent such
abuses in the future.
financial statement that summarizes sales revenue
and expenses for a period and reports one or more profit lines for the
period. It’s one of the three primary financial statements of a business.
The bottom-line profit figure is labeled net income or net earnings by
most businesses. Externally reported income statements disclose less
information than do internal management profit reports—but both are
based on the same profit accounting principles and methods. Keep in
mind that profit is not known until accountants complete the recording
of sales revenue and expenses for the period (as well as determining any
extraordinary gains and losses that should be recorded in the period).
Profit measurement depends on the reliability of a business’s accounting
system and the choices of accounting methods by the business. Caution:
A business may engage in certain manipulations of its accounting methods,
and managers may intervene in the normal course of operations for
the purpose of improving the amount of profit recorded in the period,
which is called earnings management, income smoothing, cooking the
books, and other pejorative terms.
internal accounting controls
Refers to forms used and procedures
established by a business—beyond what would be required for the
record-keeping function of accounting—that are designed to prevent
errors and fraud. Two examples of internal controls are (1) requiring a
second signature by someone higher in the organization to approve a
transaction in excess of a certain dollar amount and (2) giving customers
printed receipts as proof of sale. Other examples of internal
control procedures are restricting entry and exit routes of employees,
requiring all employees to take their vacations and assigning another
person to do their jobs while they are away, surveillance cameras, surprise
counts of cash and inventory, and rotation of duties. Internal controls
should be cost-effective; the cost of a control should be less than
the potential loss that is prevented. The guiding principle for designing
internal accounting controls is to deter and detect errors and dishonesty.
The best internal controls in the world cannot prevent most fraud
by high-level managers who take advantage of their positions of trust
profit and loss statement (P&L statement)
This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
stockholders' equity, statement of changes in
Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.
accounting rate of return (ARR)
the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow
a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation
Cost Accounting Standards Board (CASB)
a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction
a discipline in which historical, monetary
transactions are analyzed and recorded for use in the
preparation of the financial statements (balance sheet, income
statement, statement of owners’/stockholders’ equity,
and statement of cash flows); it focuses primarily on the
needs of external users (stockholders, creditors, and regulatory
a plan that aggregates monetary details
from the operating budgets; includes the cash and capital
budgets of a company as well as the pro forma financial
a monetary reward provided for performance
above targeted objectives
a discipline that includes almost
all manipulations of financial information for use by managers
in performing their organizational functions and in
assuring the proper use and handling of an entity’s resources;
it includes the discipline of cost accounting
Management Accounting Guidelines (MAGs)
pronouncements of the Society of Management Accountants of
Canada that advocate appropriate practices for specific
management accounting situations
a written expression of organizational purpose that describes how the organization uniquely meets its targeted customers’ needs with its products or services
responsibility accounting system
an accounting information system for successively higher-level managers about the performance of segments or subunits under the control
of each specific manager
Statement on Management Accounting (SMA)
a pronouncement developed and issued by the Management
accounting Practices Committee of the Institute of Management
Accountants; application of these statements is
through voluntary, not legal, compliance
n organization’s statement that reflects its
culture by identifying fundamental beliefs about what is
important to the organization
a written expression about the organization’s
future upon which all company personnel can base
their decisions and behavior so that everyone is working
toward the same long-run results
An alteration in the accounting methodology or estimates used in
the reporting of financial statements, usually requiring discussion in a footnote
attached to the financial statements.
A business for which a separate set of accounting records is being
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