What is leverage? Definition of Leverage In accounting and finance, leverage is the use of a significant amount of debt to purchase an asset, operate a company, acquire another company, etc. Since the cost of debt is...
What is leverage? Definition of Leverage In accounting and finance, leverage is the use of a significant amount of debt to purchase an asset, operate a company, acquire another company, etc. Since the cost of debt is...
Should inventories be reported at their cost or at their selling prices? Definition of Inventory Cost Inventories are reported at cost, not at selling prices. A retailer’s inventory cost is the cost to purchase the...
What are nonmanufacturing overhead costs? Definition of Nonmanufacturing Overhead Costs Nonmanufacturing overhead costs are the business expenses that are outside of a company’s manufacturing operations. In other...
Is there a difference between an expense and an expenditure? Definition of Expense An expense is reported on the income statement in the period in which the cost matches the related sales, has expired, was used up, or...
What is the cost principle? Definition of Cost Principle The cost principle is one of the basic underlying guidelines in accounting. It is also known as the historical cost principle. The cost principle requires that...
What are the typical items reported as current liabilities? Definition of Current Liabilities Current liabilities (also known as short-term liabilities) for most companies are the obligations that must be paid within one...
What is NIFO? NIFO is the acronym for next-in, first-out. NIFO is a cost flow assumption, just as FIFO and LIFO are cost flow assumptions. However, NIFO is not acceptable for financial reporting since it calls for a...
What is a noncash expense? Definition of a Noncash Expense A noncash expense is an expense that is reported on the income statement of the current accounting period, but the related cash payment took place in another...
What is the distinction between debtor and creditor? Definition of Debtor A debtor is a person or enterprise that owes money to another party. The party to whom the money is owed might be a supplier, bank, or other...
What are gross wages? Definition of Gross Wages Gross wages are the amounts earned by employees before the payroll withholding taxes and other deductions are subtracted. Sometimes gross wages is used to describe the...
What is the earnings per share (EPS) ratio? Definition of Earnings per Share The earnings per share ratio, or simply earnings per share, or EPS, is a corporation’s 1) net income (or earnings) after tax that is...
Why does our company's balance sheet report its land at cost when it is so much more valuable? Accountants are guided by the cost principle. This requires accountants to report assets at their cost when acquired—not...
What does it mean to recognize an expense? Definition of Recognize an Expense To recognize an expense means to report the proper amount of an expense on the income statement for the appropriate accounting period. When...
Are fixed assets the same as plant assets? Definition of Fixed Assets and Plant Assets My experience indicates that people use the term fixed assets to mean the same as plant assets. As a result, I define both fixed...
What are dividends? In accounting, dividends often refers to the cash dividends that a corporation pays to its stockholders (or shareholders). Dividends are often paid quarterly, but could be paid at other times. For a...
What is the difference between the terms capitalize and depreciate? Definition of Capitalize In accounting, the term capitalize refers to adding an amount to the balance sheet as an asset (as opposed to immediately...
What is the full disclosure principle? Definition of Full Disclosure Principle The full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial...
What is columnar? Prior to electronic worksheets, accountants had several pads of paper with a varying number of columns (and rows) preprinted on them. The pads of paper were labeled as columnar pads. The preprinted...
What is a current liability? Definition of Current Liability A current liability is: An obligation that will be due within one year of the date of the company’s balance sheet, and Will require the use of a current...
How does inflation affect the cost of goods sold? Inflation and the Cost of Goods Sold Generally speaking, a company selling goods during periods of inflation will see an increase in its cost of goods sold. When and by...
What is net working capital? Definition of Net Working Capital Net working capital is the amount (as opposed to being a ratio) remaining after subtracting a company’s total amount of current liabilities from its total...
What is lead time in purchasing? In purchasing, lead time is the estimated time between ordering goods and receiving the goods. For instance, if 100 units of Product X are ordered on April 11 and are expected to be...
Are salaried employees entitled to overtime pay? Some salaried employees are entitled to overtime pay. The salaried employees entitled to overtime pay are referred to as nonexempt employees. Nonexempt means that the...
How do I calculate the cost of goods sold for a manufacturing company? Calculation of the Cost of Goods Sold for a Manufacturer The calculation of the cost of goods sold for a manufacturing company is: Beginning...
Where can I find an illustration of a common size balance sheet? You will find an illustration of a common size balance sheet under AccountingCoach.com’s Explanation of Financial Ratios. The common size balance sheet...
What is included in cash and cash equivalents? Examples of Cash In accounting, a company’s cash includes the following: currency and coins checks received from customers but not yet deposited checking accounts petty...
What is inventory valuation? Definition of Inventory Valuation In the U.S., inventory valuation is the dollar amount associated with the items remaining in a company’s inventory. Generally speaking, the amount is the...
What is budgeting? Definition of Budgeting Budgeting is the process of preparing detailed projections of future amounts. Companies often engage in two types of budgeting: Operational budgeting, and Capital budgeting...
What is an expense? Definition of Expense Under the accrual method of accounting, an expense is a cost that is reported on the income statement for the period in which: The cost best matches the related revenues The cost...
Are repairs to office equipment an expense? Repairing and maintaining office equipment is an immediate expense. This is true even if the repair cost is a very large amount. If a large expenditure is made to improve...
What is accrued rent? Definition of Accrued Rent Accrued rent is the amount of rent that has not yet been paid by the tenant or received by the landlord for a past period of time. [If the tenant always pays the monthly...
What is the difference between paid-in capital and retained earnings? Definition of Paid-in Capital Paid-in capital is one of the major categories of stockholders’ equity. Generally, paid-in capital reports the amount...
What is the meaning of debtor? Definition of Debtor A debtor is a person, company, or other entity that owes money. In other words, the debtor has a debt or legal obligation to pay the amount owed. Example of Debtor If...
How do you record the interest that is unpaid on a note payable? Definition of Interest Unpaid on Note Payable Interest that has occurred, but has not been paid as of a balance sheet date, is referred to as accrued...
What is meant by events after the balance sheet date? Definition of Events After Balance Sheet Date Events after the balance sheet date are significant financial events that occur after the date of the balance sheet but...
What is long-term debt? Definition of Long-term Debt In accounting, long-term debt generally refers to a company’s loans and other liabilities that will not become due within one year of the balance sheet date. (The...
What are phantom profits? The terms phantom profits or illusory profits are often used in the context of inventory (but can also pertain to depreciation) during periods of rising costs. The amount of phantom or illusory...
What is EOQ? Definition of EOQ EOQ is the acronym for economic order quantity. The economic order quantity is the optimum quantity of an item to be purchased at one time in order to minimize the combined annual costs of...
What is interest expense? Definition of Interest Expense Interest expense is the cost of borrowing money during a specified period of time. Interest expense is occurring daily, but the interest is likely to be paid...
How should an interest only loan be recorded? Defintion of an Interest Only Loan An interest only loan specifies that only interest payments are required during the life of the loan. No principal payment is required...
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