Definition of Specialized journals
Specialized journals
journals that are used to aid in segregating duties and making the accounting function efficient.
Related Terms:
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 books.
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.
A situation in which large traders sell positions with the intention of driving prices down.
A measure of the goodness of fit of the relationship between the dependent and
independent variables in a regression analysis; for instance, the percentage of variation in the return of an
asset explained by the market portfolio return.
A standardized statistical measure of the dependence of two random variables,
defined as the covariance divided by the standard deviations of two variables.
A market in which new information is very quickly reflected accurately in share
prices.
The organizing principle of modern portfolio theory, which maintains that any riskaverse
investor will search for the highest expected return for any level of portfolio risk.
The combinations of securities portfolios that maximize expected return for any level of
expected risk, or that minimizes expected risk for any level of expected return.
In general the hypothesis states that all relevant information is fully and
immediately reflected in a security's market price thereby assuming that an investor will obtain an equilibrium
rate of return. In other words, an investor should not expect to earn an abnormal return (above the market
return) through either technical analysis or fundamental analysis. Three forms of efficient market hypothesis
exist: weak form (stock prices reflect all information of past prices), semi-strong form (stock prices reflect all
publicly available information) and strong form (stock prices reflect all relevant information including insider
information).
A portfolio that provides the greatest expected return for a given level of risk (i.e. standard
deviation), or equivalently, the lowest risk for a given expected return.
efficient set Graph representing a set of portfolios that maximize expected return at each level of portfolio
risk.
A technical accounting term that encompasses the
conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.
Internally efficient market
Operationally efficient market.
Making delivery
Refers to the seller's actually turning over to the buyer the asset agreed upon in a forward contract.
Markowitz efficient frontier
The graphical depiction of the Markowitz efficient set of portfolios
representing the boundary of the set of feasible portfolios that have the maximum return for a given level of
risk. Any portfolios above the frontier cannot be achieved. Any below the frontier are dominated by
Markowitz efficient portfolios.
Markowitz efficient portfolio
Also called a mean-variance efficient portfolio, a portfolio that has the highest
expected return at a given level of risk.
Markowitz efficient set of portfolios
The collection of all efficient portfolios, graphically referred to as the
Markowitz efficient frontier.
Mean-variance efficient portfolio
Related: Markowitz efficient portfolio
Operationally efficient market
Also called an internally efficient market, one in which investors can obtain
transactions services that reflect the true costs associated with furnishing those services.
Probability density function
The probability function for a continuous random variable.
Probability function
A function that assigns a probability to each and every possible outcome.
Purchase accounting
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.
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
asset sold.
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.
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.
Utility function
A mathematical expression that assigns a value to all possible choices. In portfolio theory the
utility function expresses the preferences of economic entities with respect to perceived risk and expected return.
Accounting
A collection of systems and processes used to record, report and interpret business transactions.
Accounting equation
The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.
Accounting period
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.
Accounting system
A set of accounts that summarize the transactions of a business that have been recorded on source documents.
Accruals accounting
A method of accounting in which profit is calculated as the difference between income when it is earned and expenses when they are incurred.
Cash accounting
A method of accounting in which profit is calculated as the difference between income
when it is received and expenses when they are paid.
Financial accounting
The production of financial statements, primarily for those interested parties who are external to the business.
Management accounting
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).
Accounting equation
The formula Assets = Liabilities + Equity.
Additional paid-in capital
Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with capital in excess of par.
Prepaid expenses
Expenses that have been paid for but have not yet been used up; examples are prepaid insurance and prepaid rent.
accounting
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
reports.
accounting equation
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.
accrual-basis accounting
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.
double-entry accounting
See accrual-basis accounting.
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.
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
and authority.
Correlation Coefficient
A measure of the tendency of two variables to change values
together
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
coefficient of correlation
a measure of dispersion that indicates the degree of relative association existing between two variables
coefficient of determination
a measure of dispersion that
indicates the “goodness of fit” of the actual observations
to the least squares regression line; indicates what proportion
of the total variation in y is explained by the regression model
coefficient of variation
a measure of risk used when the standard deviations for multiple projects are approximately
the same but the expected values are significantly different
computer-aided design (CAD)
a system using computer graphics for product designs
computer-aided manufacturing (CAM)
the use of computers to control production processes through numerically
controlled (NC) machines, robots, and automated assembly systems
cost accounting
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
decision making
the process of choosing among the alternative
solutions available to a course of action or a problem
situation
financial accounting
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
agencies)
functional classification
a separation of costs into groups based on the similar reason for their incurrence; it includes
cost of goods sold and detailed selling and administrative
expenses
input-output coefficient
a number (prefaced as a multiplier
to an unknown variable) that indicates the rate at which each
decision variable uses up (or depletes) the scarce resource
management accounting
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
objective function
the linear mathematical equation that
states the purpose of a linear programming problem
raider
a firm or individual that specializes in taking over other firms
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
Correlation coefficient
A statistic in which the covariance is scaled to a
value between minus one (perfect negative correlation) and plus one (perfect
positive correlation).
Efficient frontier
A graph representing a set of portfolios that maximizes
expected return at each level of portfolio risk. See Markowitz model.
Accounting change
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.
Accounting entity
A business for which a separate set of accounting records is being
maintained.
Accrual accounting
The recording of revenue when earned and expenses when
incurred, irrespective of the dates on which the associated cash flows occur.
Additional paid-in capital
Any payment received from investors for stock that exceeds
the par value of the stock.
Constant dollar accounting
A method for restating financial statements by reducing or
increasing reported revenues and expenses by changes in the consumer price index,
thereby achieving greater comparability between accounting periods.
Generally accepted accounting principles
The rules that accountants follow when processing accounting transactions and creating financial reports. The rules are primarily
derived from regulations promulgated by the various branches of the AICPA Council.
Paid-in capital
Any payment received from investors for stock that exceeds the par
value of the stock.
Prepaid expense
An expenditure that is paid for in one accounting period, but which
will not be entirely consumed until a future period. Consequently, it is carried on the
balance sheet as an asset until it is consumed.
additional paid-in capital
Difference between issue price and par value of stock. Also called capital surplus.
efficient capital markets
Financial markets in which security prices rapidly reflect all relevant information about asset values.
generally accepted accounting principles (GAAP)
Procedures for preparing financial statements.
Aggregate Production Function
An equation determining aggregate output as a function of aggregate inputs such as labor and capital.
Consumption Function
The relationship between consumption demand and disposable income. More generally, it refers to the relationship between consumption demand and all factors that affect this demand.
Accounting Errors
Unintentional mistakes in financial statements. Accounted for by restating
the prior-year financial statements that are in error.
Accounting and Auditing Enforcement Release (AAER)
Administrative proceedings or litigation releases that entail an accounting or auditing-related violation of the securities laws.
Accounting Irregularities
Intentional misstatements or omissions of amounts or disclosures in
financial statements done to deceive financial statement users. The term is used interchangeably with fraudulent financial reporting.
Aggressive Accounting
A forceful and intentional choice and application of accounting principles
done in an effort to achieve desired results, typically higher current earnings, whether the practices followed are in accordance with generally accepted accounting principles or not. Aggressive
accounting practices are not alleged to be fraudulent until an administrative, civil, or criminal proceeding takes that step and alleges, in particular, that an intentional, material misstatement
has taken place in an effort to deceive financial statement readers.
Cash Flow Provided or Used from Financing Activities
Cash receipts and payments involving
liability and stockholders' equity items, including obtaining cash from creditors and repaying
the amounts borrowed and obtaining capital from owners and providing them with a return on,
and a return of, their investments.
Cash Flow Provided or Used from Investing Activities
Cash receipts and payments involving
long-term assets, including making and collecting loans and acquiring and disposing of
investments and productive long-lived assets.
Change in Accounting Estimate
A change in accounting that occurs as the result of new information
or as additional experience is acquired—for example, a change in the residual values
or useful lives of fixed assets. A change in accounting estimate is accounted for prospectively,
over the current and future accounting periods affected by the change.
Change in Accounting Principle
A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
to expensing them. A change in accounting principle is accounted for in most instances
as a cumulative-effect–type adjustment.
Change in Accounting Estimate
A change in the implementation of an existing accounting
policy. A common example would be extending the useful life or changing the expected residual
value of a fixed asset. Another would be making any necessary adjustments to allowances for
uncollectible accounts, warranty obligations, and reserves for inventory obsolescense.
Contract Accounting
Method of accounting for sales or service agreements where completion
requires an extended period.
Creative Accounting Practices
Any and all steps used to play the financial numbers game, including
the aggressive choice and application of accounting principles, both within and beyond
the boundaries of generally accepted accounting principles, and fraudulent financial reporting.
Also included are steps taken toward earnings management and income smoothing. See Financial
Numbers Game.
Creative Acquisition Accounting
The allocation to expense of a greater portion of the price
paid for another company in an acquisition in an effort to reduce acquisition-year earnings and
boost future-year earnings. Acquisition-year expense charges include purchased in-process research
and development and an overly aggressive accrual of costs required to effect the acquisition.
Cumulative Effect of Accounting Change
The change in earnings of previous years assuming
that the newly adopted accounting principle had previously been in use.
Cumulative Effect of a Change in Accounting Principle
The change in earnings of previous years
based on the assumption that a newly adopted accounting principle had previously been in use.
Gain-on-Sale Accounting
Up-front gain recognized from the securitization and sale of a pool
of loans. Profit is recorded for the excess of the sales price and the present value of the estimated
interest income that is expected to be received on the loans above the amounts funded on the loans
and the present value of the interest agreed to be paid to the buyers of the loan-backed securities.
Generally Accepted Accounting Principles (GAAP)
A common set of standards and procedures
for the preparation of general-purpose financial statements that either have been established
by an authoritative accounting rule-making body, such as the Financial accounting
Standards Board (FASB), or over time have become accepted practice because of their universal
application.
Staff Accounting Bulletin (SAB)
Interpretations and practices followed by the staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure
requirements of the federal securities laws.
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