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Glossary
CHAPTER 1
Accounting: The process of identifying,
measuring, recording and communicating economic information to permit
informed judgements and economic decisions by users of the information
(p. 7).
Assurance services: Independent professional review services
that improve the quality of information, or its context, for decision
makers (p. 15).
Audit: An examination by an independent accountant of the
financial statements and supporting documents of an entity (p. 15).
Budgeting: Preparing a plan for the future operating activities
of a business entity (p. 18).
Certified practising accountant (CPA): An accountant who
has met the qualifications and experience requirements for membership
of CPA Australia (p. 15).
Chartered accountant (CA): An accountant who has met the
qualifications and experience requirements for membership of the
Institute of Chartered Accountants in Australia (p. 15).
Cost accounting: The aspect of accounting that deals with
the collection, allocation and control of the cost of producing
a product or providing a service (p. 17).
Decision: The making of a choice between two or more alternatives
(p. 5).
Economic resources: Resources which are scarce and are traded
in the marketplace at a price (p. 6).
Financial accounting: That part of accounting which provides
information to external users to assist them in assessing the entity's
financial performance, financial position, and financing and investing
activities (p. 13).
General-purpose financial reports: Reports designed to meet
the information needs of a wide range of users who are unable to
command the preparation of reports to satisfy individual specific
information needs (p. 10).
Insolvent: Unable to pay debts as they fall due (p. 16).
Internal audit: The ongoing investigation of compliance with
established procedures and policies of an entity by its internal
audit staff (p. 18).
Liquidation: The process of winding up the affairs of a company
so that it ceases to exist (p. 16).
Management accounting: That part of accounting which provides
information to management for planning, controlling and decision
making (p. 13).
Special-purpose financial reports: Reports prepared for users
who have specialised needs and who possess the authority to obtain
information to meet those needs (p. 10).
Transactions: The events that are identified as making up
the economic activities of an entity (p. 7).
CHAPTER 2
Accounting entity assumption: The assumption that a business
entity is separate and distinct from its owners and from other business
entities (p. 40).
Accounting equation: An algebraic expression of the equality
of assets to liabilities and owner's equity: Assets = Liabilities
+ Owner's equity (p. 34).
Accounts payable: Amounts owed to suppliers for the purchase
of goods or services; also referred to as creditors or trade creditors
(p. 35).
Accounts receivable: Amounts due from customers for the sale
of goods or services; also referred to as debtors, trade debtors
or book debts (p. 37).
Assets: Future economic benefits controlled by the entity
as a result of past transactions or other events (p. 35).
Company (or corporation): A form of business structure incorporated
to operate as a business entity under the Corporations Act 2001
throughout Australia (p. 30).
Cost assumption: The accounting assumption that resources
and services acquired by a business are recorded initially at cost
as a reflection of economic value (p. 40).
Creditor: A person or business entity to whom a debt is owed
(p. 35).
Debtor: A person or business entity from whom a debt is owed
(p. 37).
Double-entry accounting: The accounting system where every
transaction affects two (or more) components of the accounting equation
(p. 47).
Drawings: The withdrawal of assets from the business entity
by its owner(s) (p. 37).
Economic substance: Accounting transactions and events are
reported on the basis of economic reality rather than legal form
(p. 42).
Effectiveness: A measure of how well an entity attains its
goals (p. 31).
Efficiency: Maintaining a satisfactory relationship between
an entity's resource inputs and its outputs of products or services
(p. 31).
Expense recognition principle: The principle that expenses
should be recognised when it is probable that the consumption or
loss of economic benefits has occurred and can be reliably measured
(p. 46).
Expenses: Decreases in owner's equity (apart from drawings)
representing the consumption or loss of economic benefits in the
form of reductions in assets or increases in liabilities (p. 37).
Financial position: The economic condition of a reporting
entity, having regard to its control over economic resources, financial
structure, capacity for adaptation, and solvency (p. 33).
Financing activities: Activities relating to the raising
of funds for an entity to carry out its operating and investing
activities (p. 33).
Going concern assumption: The assumption that an entity will
continue in the future and use its assets in operations rather than
sell them (p. 41).
Investing activities: Activities associated with the acquisition
and sale of an entity's non-current assets (p. 33).
Liabilities: Future sacrifices of economic benefits that
an entity is presently obliged to make to other entities as a result
of past transactions or other events (p. 35).
Limited liability: In a company, shareholders are liable
to contribute to the assets of a company only to the extent of amounts
unpaid on their shares (p. 30).
Management by exception: The concentration on performance
results that deviate significantly from those planned (p. 32).
Management functions: The planning, organising,directing and
controlling required to manage an organisation (p. 31).
Materiality: The extent to which information can be omitted,
misstated or grouped with other information without misleading the
users of that information when they are making their economic decisions
(p. 42).
Net assets: Total assets minus total liabilities (as in the
narrative form of statement of financial position) (p. 35).
Net loss: The excess of expenses over revenues (p. 37).
Net profit: The excess of revenues over expenses (p. 37).
Operating activities: Activities associated with the provision
of an entity's goods or services (p. 33).
Operating statement: See Statement of financial performance.
Organisation: A group of people who share common goals with
a well-defined division of labour (p. 31).
Owner's equity: The residual interest in the assets (less
liabilities) of an entity (p. 35).
Partnership: A form of business structure under which a business
entity is owned by two or more people as partners sharing profits
and losses (p. 30).
Performance: The entity's ability to operate its assets efficiently
and effectively in the conduct of its activities (p. 33).
Period assumption: The assumption that the life of an entity
can be divided into arbitrary equal time intervals for reporting
purposes (p. 41).
Relevance: A quality of information which exists when the
information influences an economic decision made by a user (p. 41).
Reliability: A quality of information which assures the user
that information in financial reports represents faithfully, without
bias or undue error, the transactions and events being reported
(p. 42).
Revenue recognition principle: The principle that revenues
should be recognised when it is probable that an increase in economic
benefits has occurred and can be reliably measured (p. 45).
Revenues: The inflows or savings in outflows of economic
benefits that result in increases in owner's equity during the reporting
period (excluding capital contributions by owners) (p. 37).
Shareholder: A person or entity owning shares in a company
(p. 30).
Single proprietorship (sole trader): A form of business structure
in which the business entity is owned by an individual (p. 30).
Statement of cash flows: A financial statement which reports
the cash flows in and out of an entity. The cash flows are classified
into operating, investing and financing activities (p. 39).
CHAPTER 3
Account: A device used to record increases and decreases
for each item that appears in a financial statement (p. 69).
Account balance: The difference between the sum of the dollar
amounts of debits and credits recorded in a particular account (p.
69).
Accounting cycle: The sequence of accounting procedures (from
transactions to financial statements) that takes place during each
accounting period (p. 68).
Accounting manual: A guide to the accounting policies and
procedures used by the accounting staff of an entity (p. 77).
Accounting period: A period of time covered by a set of financial
statements (p. 68).
Annual report: A set of financial statements issued at the
end of an entity's accounting period (p. 68).
Australian business number (ABN): An eleven-digit number
given to each business entity which has registered for the goods
and services tax (GST) in Australia (p. 68).
Book of original entry: See Journal.
Chart of accounts: A schedule listing the titles of all accounts
contained in the ledger together with an appropriate numbering system
for the accounts (p. 74).
Compound journal entry: A journal entry involving three or
more accounts (p. 81).
Credit: An amount entered on the right-hand side or in the
credit column of an account (p. 69).
Creditors: Parties to whom the entity has an obligation;
alternatively, another name for the Accounts Payable account (p.
72).
Debit: An amount entered on the left-hand side or in the
debit column of an account (p. 69).
Debtors: Parties that have an obligation to the entity; alternatively,
another name for the Accounts Receivable account (p. 72).
Entering or journalising: The process of recording a transaction
in the journal (p. 81).
External transactions: Transactions involving parties outside
the business entity (p. 66).
General journal (two-column journal): A record book containing
a chronological listing of transactions (p. 81).
General ledger: A collection of accounts maintained by an
entity to enable the preparation of that entity's financial statements
(p. 69).
GST Collections: The account recording the GST received or
receivable by a GST-registered entity from its customers and clients
(p. 73).
GST Outlays: The account recording the GST paid or payable
by the GST-registered entity to its suppliers (p. 73).
Interim statements: Financial statements prepared between
the annual reports, usually half-yearly or quarterly (p. 68).
Internal transactions: Business activities in which only
the single business entity participates, such as the use of supplies
by an employee (p. 66).
Journal (book of original entry): A record in which transactions
are initially recorded (p. 80).
Journal entry: The format in which a transaction is entered
in the general journal (p. 81).
Net loss: Excess of expenses over revenues (p. 74).
Net profit: Excess of revenues over expenses (p. 74).
Normal account balance: The side or column of the account
on which increases are recorded (p. 79).
Posting: The process of transferring information recorded
in a journal to the individual accounts in the ledger (p. 82).
Running balance account: An account format which enables the
balance of the account to be calculated after each transaction affecting
that account (p. 70).
Slide: An error in which the decimal point is shifted to
the left or right (p. 103).
Source document: A paper, form or computer record that provides
evidence that a transaction has occurred (p. 67).
Statement of financial performance or operating statement: A
financial report listing the revenues, expenses and net profit/operating
surplus or net loss/deficit of an entity for a certain time period;
commonly called a profit and loss statement (p. 36).
Statement of financial position: A financial report listing
the assets, liabilities and owner's equity of a business entity
as at a specific date; commonly called a balance sheet (p. 34).
T account: An account format shaped like the letter T, in which
the left-hand side of the account is the debit side and the right-hand
side is the credit side (p. 69).
Trade creditors: Another name for the Accounts Payable account
(p. 72).
Trade debtors: Another name for the Accounts Receivable account
(p. 72).
Transposition: An error in which the order of the digits
of a number is altered (p. 103).
Trial balance: A statement listing all of the accounts in
the general ledger and their debit or credit balances. A trial balance
is prepared to verify the equality of debits and credits made to
the accounts (p. 102).
CHAPTER 4
Accruals: Expenses that have been incurred but not recorded,
or revenues that have been earned but not recorded (p. 127).
Accumulated depreciation: The amount of depreciation that has
been recorded and accumulated on an asset since it was acquired;
it is usually recorded in a contra account (p. 133).
Adjusted trial balance: A trial balance taken from the ledger
after the adjusting entries have been posted (p. 141).
Adjusting entries: Journal entries made at the end of an
accounting period to update or correct the account balances (p.
127).
Carrying amount (book value): The original cost of an asset
less (if applicable) its accumulated depreciation (p. 134).
Contra account: An account that is deducted from a related
account (p. 133).
Crossadding: Adding or subtracting horizontally across a
worksheet (p. 151).
Current assets: Cash and other types of assets that are reasonably
expected to be converted to cash, sold or consumed by a business
entity within its operating cycle (if this is discernible) or within
12 months of the balance date (p. 147).
Current liabilities: Obligations of the entity that are reasonably
expected to be settled within the entity's operating cycle (if discernible),
or within 12 months of the balance date (p. 148).
Deferrals: Assets that represent expenses paid in advance,
and revenues received in advance that represent liabilities until
the revenues can be recognised as earned (p. 127).
Depreciation: That portion of the cost (or other value) of
a non-current asset that is assigned to expense over time (p. 132).
Expired cost: The cost of an asset used up in producing revenue;
an expense (p. 125).
Intangible assets: Assets that usually do not have a physical
existence and derive value from the rights that possession confers
on their holders (p. 148).
Investments: Assets held for investment purposes rather than
for use in the normal activities of the entity (p. 148).
Liquidity: The ability of an entity to satisfy its short-term
financial obligations; also refers to the average length of time
it takes to convert a non-cash asset into cash (p. 144).
Non-current liabilities: Obligations of the entity that do
not require payment within the operating cycle or within 12 months
of the balance date (p. 148).
Operating cycle: The average period of time it takes for
an entity to purchase or manufacture inventory or perform services,
and then receive cash from the sale (p. 147).
Permanent (real) accounts: Accounts reported in the statement
of financial position (p. 126).
Property, plant and equipment: Resources of the entity that
are physical in nature, have a relatively long useful life, and
are used in the activities of the entity (p. 148).
Temporary (nominal) accounts: Accounts (revenue, expense
and drawings accounts) which are reduced to a zero balance at the
end of an accounting period (p. 126).
Unexpired cost: A cost that has not been used to produce
revenue and has future economic benefits to the entity; unexpired
costs are initially recorded as assets (p. 125).
Useful life: The estimated period of time a non-current asset
is expected to be used by the entity (p. 132).
Working capital: The excess of current assets over current
liabilities (p. 144).
Worksheet: A spreadsheet, prepared either manually or electronically,
used by accountants to gather and organise information to enable
preparation of the financial statements, and/or for use in the adjusting
and closing processes of the accounting cycle (p. 149).
CHAPTER 5
Accumulated losses: The losses incurred by a company (p. 206).
Closing entries: Journal entries made at the end of an accounting
period to reduce revenue, expense and drawings accounts to a zero
balance and transfer the net balance to the owner's capital account
in a sole trader business or, in the case of a company, to the retained
profits accounts (p. 177).
Dividend: A distribution of profit by a company to its shareholders,
usually in the form of cash (p. 206).
Interim statements: Financial statements prepared between
the annual financial reports (p. 178).
Post-closing trial balance: A trial balance taken after the
adjusting and closing entries have been posted to the accounts and
the permanent accounts balanced (p. 199).
Retained profits: Profits of a company that have been retained
in the business rather than distributed to shareholders (p. 206).
Reversing entries: Entries made to reverse the effects of
certain adjusting entries (p. 200).
Share capital: The capital invested in the company by its
shareholders (p. 206).
CHAPTER 6
Adjustment (GST): An increase or decrease in the net GST
payable or refundable for a given tax period as a result of goods
returned, a refund, an allowance made, or an amount written off
a debt (p. 227).
Adjustment note: A source document, issued by a GST-registered
business, evidencing that an amount owing has been adjusted. The
adjustment applies to any GST included in the amount adjusted. The
adjustment note must be in a format complying with GST legislative
requirements (p. 227).
Administrative expenses: Expenses associated with the operations
of the general, accounting and personnel offices (p. 225).
Beginning inventory: Goods or stock on hand at the beginning
of an accounting period that are available for sale to customers
in the normal course of business (p. 240).
Cash discount: An incentive offered to the buyer to induce
early payment of a credit sale; also known as a settlement discount
(p. 230).
Cost of goods sold: An amount that is deducted from sales
in the statement of financial performance and is a measure of the
cost of the inventory sold during the accounting period (p. 225).
Credit period: The period of time granted for the payment
of an account (p. 230).
Credit terms: The agreement made between buyer and seller
concerning the sale of goods on credit (p. 230).
Discount allowed: An expense which results from cash discounts
taken by customers on the sale of inventory (p. 230).
Discount period: The period of time in which a cash discount
may be subtracted from the invoice price before payment or receipt
(p. 230).
Discount received: Revenue which results from cash discounts
taken by an entity on goods purchased for resale (p. 230).
Ending inventory: Goods or stock on hand at the end of an
accounting period that are available for sale to customers in the
ordinary course of the business (p. 240).
Expenses to sales ratio: A ratio that reflects the portion
of each sales dollar needed to meet expenses (p. 252).
Financial expenses: Expenses incurred in relation to the
financing of the enterprise, collecting debts and running the credit
department (p. 225).
FOB destination: Shipping terms in which freight is paid
by the seller (p. 233).
FOB shipping point: Shipping terms in which freight is paid
by the buyer (p. 233).
Freight inwards (transportation-in): A cost incurred by the
buyer in transporting inventory purchases (p. 235).
Freight outwards: Transportation (delivery) expense incurred
by the seller to deliver goods to customers (p. 233).
Gross profit or gross margin on sales: Net sales less cost of
goods sold (p. 225).
Gross profit ratio: A ratio which represents the portion
of sales reflected in gross profit (p. 251).
Inventory: Goods or property acquired by a retail business
for the purposes of resale in the ordinary course of operations
(p. 224).
Inventory turnover: A ratio that indicates the number of
times average inventory has been sold during a period (p. 252).
Periodic inventory system: A system of accounting for inventory
in which the goods on hand are determined by a physical count and
the cost of goods sold is equal to the beginning inventory plus
net purchases less ending inventory (p. 240).
Perpetual inventory system: A system of accounting for inventory
that provides a continuous and detailed record of the goods on hand
and the cost of goods sold (p. 233).
Physical inventory (stocktake): The process of counting and
pricing the goods on hand (p. 238).
Profit margin: A ratio which represents the portion of sales
which ends up as (net) profit (p. 251).
Purchases: An account used in a periodic inventory system
to record the cost of goods acquired for resale to customers (p.
241).
Purchases returns and allowances: An account used in the
periodic inventory system to record the return by an entity of inventory
or adjustments made to the purchase price (p. 242).
Sales: Revenue of a retail business represented by the sales
price of goods sold (p. 225).
Sales returns and allowances: The selling price of inventory
returned by customers or adjustments made to the sales price (p.
230).
Selling expenses: Expenses that result from efforts to store,
sell and deliver goods to customers (p. 225).
Tax invoice: A source document issued by a GST-registered
business evidencing the sale of a taxable supply, and which complies
with GST legislative requirements (p. 226).
Trade discounts: A reduction in the suggested list price
granted to certain customers. Trade discounts are not recorded in
the accounts but appear as a deduction from the list price shown
on the invoice (p. 232).
CHAPTER 7
Accounting system: A collection of source documents, records,
procedures, management policies and data- processing methods used
to transform economic data into useful information (p. 270).
Batch processing: Accumulating a volume of data and processing
it at the one time (p. 296).
Cash payments journal: A special journal used to record all
cash payments by an entity (p. 283).
Cash receipts journal: A special journal used to record transactions
involving the receipt of cash by an entity (p. 279).
Control account: A general ledger account that is supported
by the detail of a subsidiary ledger (p. 272).
Integrated accounting package: A computer package consisting
of several modules, each performing a separate accounting function,
in which entries made in one module are recorded automatically in
other relevant modules (p. 297).
Online processing: A technique that involves immediate access
to the computer whenever a user wants information (p. 296).
Purchases journal: A special journal used to record all purchases
of inventory on credit (p. 276).
Sales journal: A special journal used to record all sales
of inventory on credit (p. 274).
Special journals: Books of original entry used for such repetitive
transactions as sales, purchases, cash receipts and cash payments
(p. 273).
Subsidiary ledger: A group of individual accounts, the total
of which should equal the balance of a related control account in
the general ledger (p. 271).
CHAPTER 8
Absorption costing: An inventory valuation method in which
all manufacturing costs are charged as product costs regardless
of whether they change in relation to production levels, i.e. both
variable and fixed costs are charged to inventory (p. 338).
Conversion costs: The combined costs of direct labour and
factory overhead incurred in the process of converting raw materials
into finished goods (p. 338).
Cost: An economic sacrifice of resources made in exchange
for a product or service (p. 332).
Cost behaviour: The measure of how a cost will react to changes
in the level of some activity, e.g. production or sales, within
an entity (p. 338).
Cost of goods manufactured statement: A detailed statement
of manufacturing costs reported on the statement of financial performance
of a manufacturing entity (p. 341).
Direct costing: An inventory valuation method where only
variable manufacturing costs are charged as product costs (compare
Absorption costing) (p. 338).
Direct labour cost: Represents the wages paid to employees
whose time and costs can be traced to specific products (p. 336).
Direct materials cost: The cost of raw materials that can
be economically traced as an integral part of a finished product
or services (p. 336).
Expense: A cost that is expired because it represents a consumption
or loss of future economic benefits to the entity (p. 332).
Factory overhead cost: All factory costs except direct materials
and direct labour required in the production process (p. 337).
Finished goods: The cost of the products that have been manufactured
completely and are ready for sale (p. 334).
Fixed cost: A production cost that remains constant in total
amount over a wide range of production levels (p. 339).
Manufacturing business: A business that converts raw materials
into saleable products (p. 332).
Manufacturing cost elements: The direct materials, direct
labour and factory overhead required to produce a saleable product
(p. 336).
Manufacturing worksheet: Working papers used to organise
financial data, including the manufacturing costs, and to prepare
financial statements (p. 344).
Overhead application rate: A predetermined rate used to assign
factory overhead costs to products (p. 337).
Period costs: Costs reported in the statement of financial
performance of the period in which they are incurred rather than
being costed to inventories as product costs (p. 335).
Prime cost: The cost of direct materials plus the cost of
direct labour (p. 337).
Product costs: Costs assigned to inventories during production
and reported in the statement of financial performance when the
related finished goods are sold (p. 335).
Production departments: Departments engaged directly in the
manufacturing operation required to convert raw materials into finished
goods (p. 337).
Raw materials: The cost of the basic materials that have
been purchased by a manufacturing entity and are available for conversion
into saleable products (p. 334).
Service (support) departments: Departments that support the
production departments with such activities as maintenance, production
control and stores (p. 337).
Variable cost: A production cost that varies in total amount
directly with the volume of production (p. 339).
Work in process: Inventory that has been partly converted
into finished goods (p. 334).
CHAPTER 9
Activity-based costing (ABC): A cost accounting system in
which costs are assigned to products based on cost drivers for the
various production activities required to produce the product (p.
387).
Conversion costs: The total of direct labour and factory
overhead costs incurred by a job or processing centre (p. 377).
Cost accounting: A specialised form of accounting that enables
an entity to measure, record and report product costs using a perpetual
inventory system (p. 366).
Cost accounting system: An accounting system which records
cost data in separate ledger accounts which are integrated into
the general ledger (p. 366).
Cost driver: A measure of business activity that causes the
incurrence of overhead costs (p. 375).
Cost of production report: The control document used in process
costing to account for the manufacturing costs of units in a processing
centre (p. 380).
Equivalent units: A measure in process costing of how many
equivalent whole units of output are represented by the units finished
plus the units partly finished (p. 379).
Job order costing: A cost system in which costs are accumulated
by job (p. 367).
Job cost sheet: A control document used in job order costing
to provide a detailed listing of the costs related to the completion
of a particular job (p. 369).
Just-in-time (JIT) processing: A system of manufacturing
designed to eliminate the holding of inventories by putting raw
materials directly into production when received and shipping finished
goods immediately to customers (p. 386).
Labour time ticket: A record of how much time an employee
spends on a job or an overhead assignment (p. 371).
Materials requisition form: A record of the amount of raw
materials requisitioned from the storeroom for a job or as indirect
materials (p. 370).
Overapplied factory overhead: The excess of the factory overhead
applied to work in process with a predetermined rate during a given
period over the actual factory overhead incurred (p. 374).
Predetermined overhead rate: The rate determined by dividing
estimated factory overhead or service costs for a period by some
measure of the estimated activity and used to apply overhead to
work in process/services provided (p. 373).
Process costing: A cost accounting system in which costs
are accumulated for a processing centre during a specified period
(p. 376).
Processing centre: A segment of the manufacturing operation
for which costs are accumulated in process costing (p. 377).
Underapplied factory overhead: The excess of actual factory
overhead incurred over the factory overhead applied during a particular
period (p. 374).
CHAPTER 10
Bank reconciliation statement: A statement prepared to reconcile
the balance reported on the bank statement with the bank balance
as shown in the entity's records (p. 415).
Bank statement: A statement prepared by the bank that provides
the detail of activity that has taken place in a current account
for the period covered by the statement (p. 413).
Cash: Money and any negotiable instrument such as a cheque,
postal note, credit card duplicate or electronic transfer that a
bank will accept for immediate deposit in a bank account (p. 404).
Cash budget: A projection of future cash receipts and payments
over a period of time disclosing cash position at the end of that
time (p. 424).
Dishonoured cheques: Cheques that are included in a customer's
deposit but are not paid by the drawer's bank because of some irregularity
or lack of sufficient funds (p. 415).
Imprest petty cash: A system of petty cash fund operation
where a fixed amount of cash can always be accounted for by a count
of cash plus the value of expenditure vouchers issued (p. 423).
Internal control system: The overall procedures adopted by
a business to safeguard its assets, promote the reliability of accounting
data, and encourage compliance with management policies (p. 405).
Petty cash fund: A specified amount of cash placed under
the control of an employee (petty cashier) for use in making small
cash payments (p. 420).
Petty cash voucher or receipt: A form used as a receipt for
payments from a petty cash fund (p. 421).
Solvency: The ability of an entity to pay its debts as and
when they fall due (p. 428).
Unpresented cheques or outstanding cheques: Cheques written
by a depositor that have not been presented to the bank for payment
(p. 415).
CHAPTER 11
Break-even point: The sales volume at which total revenues
and total costs are equal resulting in no net profit or loss (p.
453).
Committed fixed costs: Fixed costs that are required even
if the operation is shut down temporarily (p. 448).
Contribution margin: The sales revenue less all variable
costs (or unit selling price less unit variable cost) (p. 451).
Contribution margin ratio: The contribution margin expressed
as a percentage of sales (p. 451).
Contribution margin variance analysis: A technique used to
evaluate the difference between the actual contribution margin for
a period and the budgeted contribution margin for the same period
(p. 460).
Cost behaviour: How a cost responds to changes in the level
of activity (p. 446).
Cost function: The relationship between a cost as a dependent
variable and some measure of the level of business activity as an
independent variable (p. 446).
Cost-volume-profit (CVP) analysis: A management analysis
technique used to evaluate how costs and profits are affected by
changes in the level of business activity (p. 446).
Cost-volume-profit chart: A graphic display of the break-even
point as well as the net profit or loss for a range of activity
(p. 454).
Discretionary fixed costs: Fixed costs that can be changed
or discontinued by management if adequate time is available (p.
447).
Linearity assumption: A key assumption of CVP analysis that
all revenue and costs will behave as straight-line functions (p.
446).
Margin of safety: The excess of actual or expected sales
over break-even sales (p. 455).
Mixed cost: A cost that has both a variable component and
a fixed component (p. 446).
Relevant range: The range of activity within which a business
expects to operate and incur variable costs with constant slopes
as well as fixed costs that are constant in total amount (p. 447).
Variance: The difference between actual and planned results
(p. 460).
CHAPTER 12
Administrative expenses budget: Estimates of the administrative
expenses for the budget period (p. 499).
Budget: A quantitative plan showing how resources are expected
to be acquired and used during a specified time period (p. 476).
Budgeting: The process of preparing a budget for financial
planning and control (p. 476).
Budgeting period: The time period a budget covers; this is
typically 1 year but can be up to 5 years (p. 476).
Budget performance report: A report showing a comparison
of the actual and budgeted performance with an emphasis on variances
(p. 506).
Capital expenditure budget: A budget detailing the acquisition
of non-current assets planned for a future period (p. 501).
Cash budget: Expected cash receipts and payments during a
budget period (p. 486).
Cost of goods sold budget: An estimate of the cost of goods
sold required for the budget period (p. 498).
Direct labour budget: A projection of the direct labour needs
of a budget period based on the expected production level (p. 496).
Direct materials budget: A projection of the direct materials
that must be purchased to satisfy the production requirements of
a budget period (p. 494).
Factory overhead budget: A projection of the factory overhead
cost items required to support the expected production level (p.
496).
Financial budgets: The parts of the master budget that show
the funding and financing needed for the planned operations (p.
480).
Financial expenses budget: Estimates of financial expenses
for a budget period (p. 499).
Goal congruence: The reconciliation of the goals of individual
managers with those of the organisation (p. 478).
Master budget: A set of interrelated budgets representing
a comprehensive plan of action for a specified time period (p. 480).
Operating budgets: The components of the master budget that
describe the revenues, costs and expenses required to achieve a
satisfactory financial performance (p. 480).
Production budget: An estimate of the number of units that
will be manufactured during the budget period (p. 494).
Purchases budget: An estimate of the number of units that
will be purchased by a retail entity during the budget period (p.
481).
Sales budget: A translation of the sales forecast for a budget
period into detailed information concerning the products that are
expected to be sold (p. 491).
Selling expenses budget: Estimates of the selling expenses
needed to generate the expected sales volume for the budget period
(p. 498).
Service revenues budget: A translation of the service revenues
forecast for a budget period into detailed information concerning
the services that are expected to be provided (p. 484).
CHAPTER 13
Attainable standards: Performance targets that can be achieved
with a reasonably efficient effort (p. 539).
Avoidable expenses: Expenses or costs that can be eliminated
if a department or a product is discontinued (p. 533).
Balanced scorecard: A measurement-based management system
which aligns business activities with the vision and strategies
of an organisation, and which uses measures to monitor performance
in achieving these strategies over time (p. 541).
Controllable revenues, costs/expenses or investments: Revenues,
costs/expenses or investments that can be regulated or influenced
at a particular level of management during a specified time period
(p. 523).
Cost object: Any activity for which separate cost measurement
is performed; examples are a department or segment, or a product
(p. 528).
Departmental (segmental) accounting: Accounting procedures
required to evaluate the financial performance of individual segments
or departments within an organisation (p. 525).
Departmental contribution: The revenues of a department less
its cost of goods sold and direct expenses (p. 533).
Departmental gross profit: The revenues of a department less
its cost of goods sold (p. 526).
Departmental net profit: The revenues of a department less
its cost of goods sold, its direct expenses, and an allocated portion
of indirect expenses (p. 528).
Direct costs (expenses): Costs or expenses traceable to a
specific cost object (p. 528).
Expense allocation: A systematic and rational process used
to apportion indirect costs or expenses to departments (p. 527).
Fixed (static) budget: A budget prepared for only one level
of activity (p. 535).
Flexible budget: A series of budgets prepared for a range
of activity levels (p. 535).
Ideal standards: Performance targets achievable only with
best performance (p. 539).
Indirect costs (expenses): Costs or expenses incurred for
the common benefit of multiple cost objects (p. 528).
Management by exception: The concentration only on performance
results that deviate significantly from those planned (p. 525).
Responsibility accounting: The accounting procedures used to
evaluate the financial performance of responsibility centres (p.
522).
Responsibility centre: A business segment organised as a
cost centre, a profit centre or an investment centre so responsibility
accounting can be performed (p. 522).
Service (or support) department: A department that provides
supporting services such as personnel, advertising, accounting,
maintenance or purchasing (p. 528).
Standard costs: Carefully predetermined costs that should
be incurred to produce a product or perform a service. They are
used to plan and control an entity's financial performance and are
especially important in a manufacturing entity (p. 539).
Standard cost variances: The differences between standard
costs and actual costs which can be used in the application of management
by exception (p. 540).
Support department: See Service department.
Unavoidable costs or expenses: Expenses or costs that will
not be eliminated if a department or a product is discontinued (p.
533).
Variance: A measure of the difference between a planned or
budgeted financial performance and the actual results achieved.
A favourable cost variance occurs when the actual cost is less than
the amount budgeted. In contrast, an unfavourable cost variance
exists when the actual cost exceeds the amount budgeted (p. 524).
CHAPTER 14
Capital budgeting: The planning and financing of capital
investments (p. 570).
Cost of capital: An entity's cost of obtaining funds in the
form of borrowings or owners' equity (p. 575).
Decision making: Making a choice among alternative courses
of action (p. 562).
Decision-making process: Defining the problem, selecting
alternative courses of action, obtaining relevant information and
arriving at a decision (p. 562).
Decision model: A formalised method for evaluating alternative
courses of action (p. 563).
Differential analysis (incremental analysis): A decision
model used to evaluate the differences in relevant revenue and costs
between alternative courses of action (p. 563).
Differential cost: The difference between the relevant costs
of two alternatives (p. 563).
Differential revenue: The difference between the relevant
revenue of two alternatives (p. 564).
Discounted cash flows: Capital budgeting method used to compare
the cost of an investment with the present value of the net cash
flows from it in the future (p. 572).
Internal rate of return (IRR): The interest rate that discounts
the net cash flows from an investment so their present value is
equal to the cost of the investment (p. 577).
Joint products: More than one product produced from common
raw materials or the same production process (p. 566).
Joint product costs: Common costs required to produce joint
products before they are identifiable as separate units (p. 566).
Net present value index method: A method of evaluating investments
where an index is derived by relating the net present values of
future cash flows to initial cost (p. 576).
Net present value (NPV) method: A capital budgeting method
used to discount future net cash flows into present value terms
with the entity's cost of capital (p. 574).
Opportunity cost: The potential benefit forgone by rejecting
one alternative while accepting another (p. 564).
Payback period: The length of time required to recover the
cost of an investment from the net cash flows it generates (p. 577).
Relevant costs: Expected future costs that will differ between
alternatives (p. 563).
Relevant revenue: Expected future revenue that will differ
between alternatives (p. 564).
Residual profit (residual income): The net profit earned
in excess of a certain minimum rate of return on assets (p. 570).
Return on average investment: A capital budgeting method that
provides a measure of an investment's profitability by dividing
the average net profit after tax from an investment by average investment;
also referred to as the accounting rate of return (p. 578).
Return on investment (ROI) analysis: A technique used to
evaluate the profitability of segments of a business (p. 568).
Split-off point: The point in the production process at which
joint products become separate products (p. 566).
Sunk costs: Costs that are not relevant in decision making
because they already have been incurred and cannot be changed (p.
563).
Tax shield: The savings in cash outflows which result from
a tax-deductible expense such as depreciation (p. 576).
Unavoidable costs: Future costs that will not differ between
alternatives (p. 563).
CHAPTER 15
Fair value: The amount for which an asset could be exchanged
between knowledgeable willing parties in an arm's-length transaction
(p. 601).
General partnership: Where each partner is individually liable
for the partnership liabilities (p. 597).
Goodwill: Future benefits of unidentifiable assets (p. 601).
Limited partnership: Where one or more of the partners have
limited their liability for partnership debts to the amount of their
investment. However, at all times at least one partner must have
unlimited liability (p. 597).
Mutual agency: A characteristic whereby each partner is an
agent for the partnership and can bind the partnership to a contract
if acting within the normal scope of the business (p. 597).
Partnership: The relationship that exists between people
carrying on a business in common with a view to profit (p. 596).
Partnership agreement: The contract or agreement made among
the partners to form and operate a partnership (p. 598).
Statement of partners' equity: A financial statement that
shows the changes in each partner's equity interest during the period
(p. 610).
Unlimited liability: A characteristic of a partnership whereby
each general partner is responsible for all debts of the partnership
from personal assets if necessary (p. 597).
CHAPTER 16
Accumulated loss: Losses made by the company in previous
periods, represented by a debit balance in the Retained Profits
account (p. 636).
Allotment: The process whereby directors of the company allocate
shares to those who have applied. Alternatively, an account recording
an amount receivable on shares once allotment has been made (p.
639).
Application: The process whereby prospective shareholders
apply to the company for an allocation of shares. Alternatively,
an account recording an amount of money receivable by the company
on application for shares (p. 637).
Call: An amount of money receivable on shares which have
been allotted but not fully paid up (p. 636).
Certificate of registration: The initial legal document registering
a company (p. 633).
Company limited by guarantee: A public company whose members
undertake to contribute a guaranteed amount if the company is wound
up (p. 629).
Constitution: A document containing the rules for managing
a company, particularly in terms of relationships and dealings between
directors and shareholders, which are adopted by a company as an
alternative to the replaceable rules in the Corporations Act 2001
(p. 633).
Cumulative preference shares: Preference shares on which undeclared
dividends accumulate before any dividend can be paid to ordinary
shares (p. 646).
Dividends: Distributions of cash or other assets or a company's
own shares to its shareholders (p. 644).
Dividends in arrears: Dividends on cumulative preference
shares that are not declared in the year in which they are due (p.
646).
Limited company: A company whose members are liable only
to the extent of the amount of issue price unpaid on their shares,
or to the extent of a guaranteed amount (p. 629).
No-liability company: A company, being a mining company,
which does not have the right to require shareholders to pay calls
to the company (p. 630).
Non-cumulative preference shares: Preference shares on which
the right to receive dividends is lost in any year in which dividends
are not declared (p. 647).
Ordinary shares: A class of share that has no preferences
relative to other classes (p. 643).
Participating preference shares: Preference shares which have
the right to receive further dividends above their fixed rate after
ordinary shares have received dividends up to a stated percentage
for the period (p. 647).
Preference shares: Shares which receive preferential treatment
over ordinary shares such as a preference in dividend distributions,
and/or a preference in asset distributions if the company is wound
up (depending on the constitution) (p. 643).
Preliminary expenses: The expenditures made to form a company.
They include incorporation fees, legal fees, and promoters' and
underwriters' fees (p. 634).
Proprietary company: A company having a share capital in
which the right to transfer shares is restricted as is the right
to raise capital from the public (p. 629).
Prospectus: A legal document representing an approach by
a company to raise funds in order to carry on business (p. 633).
Public company: A company entitled to raise capital from
the public and to have its shares listed on the stock exchange (p.
629).
Replaceable rules: Rules contained in the Corporations Act
2001 relating to dealings between management and shareholders. If
the company wishes to reject such rules, it must adopt a constitution
(p. 632).
Reserve: A category of shareholders' equity created either
by common business practice or in accordance with accounting standards
(p. 650).
Retained profits: The accumulated profits of a company that
have been retained in the company rather than distributed to shareholders
as dividends (p. 636).
Share capital: The amount of cash or other assets invested
in the company by its shareholders (or members) (p. 635).
Share dividends: A pro rata distribution of a company's own
shares to its shareholders (p. 647).
Share issue costs: The costs directly associated with the
issue of shares, including stamp duty, broker's fees, underwriter's
fees, professional adviser's fees and printing costs (p. 634).
Share split: A decrease in the issue price of shares with
a proportionate increase in the number of shares (p. 649).
Taxable income: The amount of profit as determined by the
Australian Taxation Office on which the current income tax liability
is calculated (p. 651).
Tax payable method: An accounting method whereby income tax
expense is calculated as the tax rate times taxable income (p. 652).
Uncalled capital: The amount of issued share capital that
has not yet been called by the company (p. 636).
Unlimited company: A company in which shareholders are fully
liable for all debts of the company (p. 630).
CHAPTER 17
Accountability: The responsibility of providing information
to enable users to make informed judgements about the performance,
financial position, financing and investing, and compliance of the
reporting entity (p. 687).
Accounting practice statements (APSs): Statements issued
by the accounting profession and made mandatory for practising accountants
covering broad issues such as compliance with standards and practice
quality controls (p. 677).
Accounting standards: Standards issued by the AASB for recording
and communicating transactions and other economic events in all
types of entities (p. 677).
Assets: Future economic benefits controlled by the entity
as a result of past transactions or other past events (p. 691).
Comparability: That quality of financial information which
exists when users are able to discern and evaluate similarities
and differences between transactions and events, at one time and
over time, for one entity or a number of entities (p. 689).
Consistency: The notion that once a particular accounting method
is adopted it should not be changed from period to period unless
a different method provides more useful information (p. 689).
Control: In relation to an asset, the capacity of an entity
to receive future economic benefits in pursuing its objectives and
to deny or regulate the access of others to those benefits (p. 691).
Dividends: The return received for holding share investments
in companies (p. 696).
Economic entity: A group of entities comprising a controlling
entity and one or more controlled entities operating together to
achieve objectives consistent with those of the controlling entity
(p. 686).
Equity: The residual interest in the assets of the entity
after deduction of its liabilities (p. 692).
Expenses: Consumptions or losses of future economic benefits
in the form of reductions in assets or increases in liabilities
of the entity, other than those relating to distributions to owners,
that result in a decrease in equity during the reporting period
(p. 692).
Financial position: The economic condition of a reporting
entity, with regard to its control over economic resources, financial
structure, capacity for adaptation and solvency (p. 687).
General-purpose financial reports: Financial reports intended
to meet the information needs common to a range of users who are
unable to command the preparation of reports tailored to satisfy,
specifically, all of their information needs (p. 686).
Going concern assumption (continuity): The assumption that
a business will continue to operate in the future unless there is
evidence to the contrary (p. 698).
Liabilities: The future sacrifices of economic benefits that
the entity is presently obliged to make to other entities as a result
of past transactions or other past events (p. 691).
Matching process: The process of recognising expenses by
associating costs incurred with the revenues recognised (p. 697).
Materiality: A test concerned with the magnitude of relevant
and reliable information to assess whether its omission, misstatement
or non-disclosure would affect the users' economic decision making,
based on financial reports of a particular entity (p. 688).
Monetary assumption: The use of money in accounting as the
common denominator by which economic activity is measured and reported
(p. 699).
Non-reciprocal transfer: A transfer of assets in which the
entity receives assets or services without giving approximately
equal value in exchange for the assets or services received (p.
696).
Percentage-of-completion method: A method of accounting for
service contracts and long-term construction contracts under which
revenue is recognised in proportion to the services or work completed
during the period (p. 696).
Performance: The proficiency of an entity in acquiring and
using its net assets efficiently and effectively (p. 687).
Period assumption: The assumption that the economic life
of an entity can be split into relatively short time intervals for
the purposes of profit determination (p. 699).
Prudence: A notion concerning the accountant's desire to
exercise care and caution in situations of uncertainty as part of
ensuring the reliability of information (p. 688).
Realisation (of revenue): The point of revenue recognition
only after revenue is earned through sales, and the amount of cash
received or to be received is known with certainty or near certainty
(p. 694).
Recognition: The process of incorporating an entity's assets,
liabilities, revenues and expenses into the entity's accounts (p.
693).
Relevance: A quality of financial information which influences
economic decisions by helping users to form predictions, to confirm
or correct past evaluations and to assess the rendering of accountability
by preparers (p. 688).
Reliability: A quality of financial information which exists
when that information can be depended on to represent faithfully,
without bias and undue error, the transactions or events that it
either purports to represent or could reasonably be expected to
represent (p. 688).
Reporting entity: Any entity or economic entity where it
is reasonable to expect the existence of users depending on general-purpose
financial reports for information used in economic decision making
(p. 686).
Revenues: Inflows, or other enhancements or savings in outflows,
of future economic benefits in the form of increases in assets or
reductions in liabilities of the entity, other than those relating
to contributions by owners, that result in an increase in equity
during the reporting period (p. 692).
Royalties: Rights of composers and authors to receive payments
from publishing companies for the sale of their music or books.
Also money received by the owner of land from a mining company which
has been given the right to mine mineral reserves on the owner's
land (p. 696).
Statements of accounting concepts (SACs): Statements issued
with the aim of establishing a conceptual framework to be used as
a guide in the preparation and presentation of general-purpose financial
reports (p. 677).
Substance over form: A characteristic of information where
the economic substance of a transaction takes precedence over its
legal form (p. 688).
Understandability: That quality of financial information
which exists when users of that information are able to comprehend
its meaning (p. 690).
CHAPTER 18
Accounts receivable: Amounts due from customers for sales
or services performed on credit; also commonly referred to as trade
debtors (p. 716).
Ageing of accounts receivable: The process of classifying
accounts receivable on the basis of the length of time they have
been outstanding; also a basis for determining the amount of the
allowance for doubtful debts (p. 720).
Allowance for doubtful debts: The estimated amount of accounts
receivable expected to be uncollectable (p. 718).
Average collection period: Number of days taken to collect
amounts due from receivables for credit sales (p. 727).
Bad debts expense: The expense resulting when allowance is
made for estimated uncollectable accounts (p. 718).
Bill of exchange: An unconditional order in writing, addressed
by one person or entity to another, requiring the person or entity
to whom it is addressed to pay a certain sum of money to a designated
person or order on a determinable future date (pp. 716, 731).
Bill receivable: A receivable evidenced by a formal written
promise or order to pay (p. 716).
Contingent liability: A possible liability that may become
an actual liability if specific events occur (p. 736).
Credit card: A plastic card which enables the holder to obtain
credit up to a predetermined limit from the issuer of the card for
the purchase of goods and services (p. 729).
Credit department: The organisational unit responsible for
the credit and collection policies of the business (p. 726).
Debit card: A plastic card used in the electronic funds transfer
point of sale (EFTPOS) system, where funds are debited to the card
user's account at the bank and transferred instantaneously to the
credit of the account of the seller of the goods or services (p.
731).
Direct write-off method: The recognition of bad debts expense
at the time an account receivable is deemed to be uncollectable
(p. 724).
Discount (in relation to bills of exchange): Interest deducted
in advance, in practice at the effective interest rate or yield
(p. 735).
Discount period: The period of time for which interest on
a discounted bill is charged (p. 735).
Dishonoured bill: A bill the drawer has failed to pay on
its maturity date (p. 735).
Factor: A business or financial institution which buys accounts
receivable for a fee, and then collects the cash from the receivables
(p. 729).
Factoring: The purchase of accounts receivable by a factor
business (p. 729).
Interest (in relation to bills of exchange): A charge made
for the use of money, calculated as Principal ¥ Rate ¥ Time
(p. 733).
Maturity date: The date on which the maturity value of a
bill is due (p. 733).
Maturity value: The amount of a bill due on its maturity
date; it includes principal as well as interest (p. 733).
Percentage of net credit sales: A method used to determine
the amount of the allowance for doubtful debts (p. 720).
Principal: The face amount of a bill (p. 733).
Proceeds: The maturity value of a bill less discount (p.
735).
Promissory note: An unconditional written promise to pay
a sum certain in money on demand or at a future determinable date
(pp. 716, 732).
Receivables turnover ratio: A ratio which measures the number
of times average receivables are converted into cash during a period
(p. 727).
Trade debtors: Another term for accounts receivable (p. 716).
CHAPTER 19
Additional mark-up: An increase above original retail prices
(excluding GST) because of unusual demand or rises in the general
level of prices (p. 775).
Average cost: An inventory costing method in which an average
unit cost is calculated by dividing the total cost of goods available
for sale by the total number of units available for sale. Moving
average (perpetual inventory system) and weighted average (periodic
inventory system) are variations of the average cost method (p.
760).
Consignee: An entity or individual holding goods on consignment;
does not own the goods held (p. 756).
Consignment: A marketing arrangement whereby merchandise
is transferred from one entity (the consignor) to another (the consignee
or agent) in order that the consignee may sell the goods on behalf
of the consignor; however, title and control of the goods remain
with the consignor (p. 756).
Consignor: An individual or entity that ships goods on consignment.
Title to the goods is retained by the consignor until the goods
are sold by the consignee, at which time title passes to the purchaser
(p. 756).
First-in, first-out (FIFO): A cost flow assumption in inventory
costing that assumes the first units purchased were the first units
sold. The cost of ending inventory is assumed to be the cost of
the most recently purchased units (p. 759).
Gross profit method: A method used to estimate ending inventory
value based on the assumption that the gross profit percentage is
approximately the same from period to period (p. 776).
Last-in, first-out (LIFO): A cost flow assumption in inventory
costing that assumes the most recent units purchased were the first
units sold. The cost of ending inventory is assumed to be the cost
of the earliest units purchased (p. 760).
Lower of cost and market: Inventory valuation method where
inventory is valued at lower of original cost and market on the
reporting date, where 'market' refers to net realisable value of
inventory at reporting date (p. 769).
Mark-down: A price reduction to promote sales (p. 776).
Mark-down cancellation: Reversal of a mark-down whereby inventory
not sold at a sales promotion reverts to its normal retail price
(p. 776).
Mark-up cancellation: Reversal of a mark-up. A downward revision
on retail prices because of lack of demand or an excessive mark-up
(p. 775).
Moving average: An inventory costing method by which an average
unit cost is calculated after each purchase. The method applies
only where a perpetual inventory system is being used (p. 766).
Net realisable value: The market value based on estimated
proceeds of sales less, where applicable, GST, all further costs
of production, marketing, selling and distribution to customers
(p. 769).
Replacement cost: The current cost at which an identical
inventory item could be purchased or manufactured at reporting date
under normal purchasing/production quantities and conditions (p.
769).
Retail inventory method: A method used to estimate the ending
inventory value based on the relationship of cost to retail prices
(excluding GST) (p. 774).
Specific identification: An inventory costing method by which
the cost of a specific item sold can be separately identified from
the cost of other units held in the inventory (p. 758).
Weighted average: An inventory costing method by which an average
cost per unit is calculated by dividing the total cost of units
available for sale by the total number of units available for sale.
It is used in the periodic inventory system (p. 760).
CHAPTER 20
Accelerated depreciation method: Any depreciation method
that results in greater depreciation expense in the early years
of an asset's life than in later years (p. 805).
Acquisition date: The date on which the acquirer of assets
gains control of the assets (p. 794).
Borrowing costs: Interest costs and other costs incurred
in connection with the borrowing of funds (p. 795).
Capital budgeting: The planning and financing of capital
investments, such as replacement of equipment, expansion of production
facilities, and introduction of new products (p. 814).
Carrying amount: The recorded cost of an asset minus accumulated
depreciation (p. 800).
Cost of acquisition: Purchase consideration plus incidental
costs directly attributable to the acquisition of an asset (p. 794).
Depreciable amount: The historical cost of a depreciable
asset, or other revalued amount substituted for historical cost
in the accounting records, less, in either case, the residual value
(p. 800).
Depreciable asset: A non-current asset having a limited useful
life (p. 798).
Depreciation: An allocation of a depreciable asset's depreciable
amount to reflect the consumption or loss of its future economic
benefits through wear and tear and obsolescence (p. 798).
Fair value: The amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm's-length transaction
(p. 794).
Finance lease: A lease whereby substantially all of the risks
and benefits of ownership are transferred from the lessor to the
lessee (p. 797).
Leasehold improvements: Permanent improvements to leased
property made by the lessee (p. 809).
Lessee: The entity which has leased an asset from the lessor
(p. 797).
Lessor: The entity which has leased an asset to the lessee
(p. 797).
Lump-sum acquisition: The purchase of a group of assets for one
total payment (p. 796).
Operating lease: A lease where the lessor effectively retains
all of the substantial risks and benefits associated with ownership
of the leased asset (p. 797).
Purchase consideration: The fair value at acquisition date
of all assets given up, shares issued, and liabilities undertaken
in order to acquire an asset (p. 794).
Qualifying asset: An asset that necessarily takes a substantial
period of time (i.e. usually longer than 1 year) to get ready for
its intended use or sale (p. 795).
Reducing-balance depreciation: A depreciation method that
results in a decreasing depreciation charge over the useful life
of the asset, by applying a predetermined depreciation rate to the
carrying amount of the asset (p. 800).
Residual value: An estimate at acquisition date of the net
amount recoverable on disposal of an asset at the end of its useful
life to the entity (p. 799).
Straight-line depreciation: A depreciation method that allocates
an equal amount of an asset's depreciable amount to each period
in its useful life (p. 800).
Sum-of-years'-digits depreciation: A depreciation method
under which the depreciable amount of an asset is allocated to depreciation
on a fractional basis. The denominators of the fractions are the
sum of the digits in the asset's useful life. The numerators of
the fractions are the years remaining in the asset's useful life
at the beginning of the period (p. 802).
Units-of-production depreciation: A depreciation method under
which the depreciable amount of an asset is allocated to depreciation
expense based on the number of production units produced during
the period (p. 803).
Useful life: The estimated time period over which the future
economic benefits embodied in a depreciable asset are expected to
be consumed by the entity; or the estimated total service, expressed
in terms of production or similar units, that is expected to be
obtained from the asset by the entity (p. 799).
CHAPTER 21
Amortisation: The periodic allocation of the cost of intangible
assets and natural resources to the periods benefiting from their
use (pp. 843, 846).
Carrying amount (book value): The amount at which an asset is
recorded in the accounts at a particular date. For a depreciable
asset, carrying amount means the net amount after deducting accumulated
depreciation from cost or revalued amount (p. 830).
Cash-generating unit: The smallest identifiable group of
assets that generates cash inflows from continuing use, which are
independent of cash inflows from other groups of assets (p. 835).
Composite-rate depreciation: A depreciation method under
which a single average depreciation rate is applied to the cost
of a functional group of assets (p. 841).
Copyright: An exclusive right to reproduce and sell an artistic
or published work (p. 848).
Depletion: See Amortisation (p. 843).
Discount on acquisition: The excess of the fair value of
identifiable net assets over the purchase price (p. 850).
Fair value: The amount for which an asset could be exchanged
between knowledgeable, willing parties in an arm's-length transaction
(p. 849).
Franchise: A right granted by a company or government body
to conduct a franchised business at a specified location or in a
specific geographical area (p. 849).
Goodwill: The future benefits from unidentifiable assets
(p. 849).
Identifiable assets: Those assets that are capable of being
both individually identified and specifically brought to account
(p. 845).
Impairment: As applied to an individual asset, the situation
where the asset's recoverable amount is less than its carrying amount
(p. 834). As applied to a cash-generating unit, the situation where
the fair value of the group of assets as a whole is less than the
carrying amount of that group (p. 835).
Intangible assets: Identifiable non-monetary assets without
physical substance held for use in the operations of an entity (p.
845).
Monetary assets: Cash or claims to cash, the face values
of which do not change even when prices rise or fall (p. 851).
Net market value: The amount that an entity can expect to
receive from disposal of an asset in an active market, after deducting
costs expected to be incurred in realising the proceeds of such
a disposal (p. 844).
Non-monetary assets: All assets which are not monetary assets
(p. 851).
Patent: An exclusive right to produce and sell a particular
product or process for a period of 20 years (p. 846).
Recoverable amount: The higher of an asset's net selling
price and its value in use (p. 835).
Research and development costs: Costs incurred in gaining
new knowledge and developing such knowledge for creation of new
products or processes, or improvements to existing products or processes
(p. 846).
Revaluation decrement: The amount by which the fair value
of a non-current asset within a class at revaluation date is less
than the asset's carrying amount (p. 830).
Revaluation increment: The amount by which the fair value
of a non-current asset within a class at revaluation date exceeds
the asset's carrying amount (p. 830).
Self-generating and regenerating assets: Living assets that
are non-human (p. 844).
Unidentifiable assets: Those assets which are not capable
of being both individually identified and specifically brought to
account (p. 845).
Value in use: The present value of future net cash flows
expected from the continuing use of an asset and from its disposal
at the end of its useful life (p. 835).
CHAPTER 22
Accommodation bills: See Commercial bills (p. 873).
Accounts payable: Amounts owed to creditors for the purchase
of merchandise, supplies and services in the normal course of business;
also commonly referred to as trade creditors (p. 872).
Annual leave: Paid leave per year granted to all employees
under industrial awards and employment contracts (p. 877).
Bill payable: An obligation evidenced by a formal written
promise or order to pay a certain amount on a set date (p. 872).
Collateral: Something of value that is acceptable to a lender
as security for a loan (p. 881).
Commercial bills: Bills of exchange used in obtaining short-term
finance; also known as accommodation bills (p. 873).
Contingent liability: A possible liability arising from a
past event that will be confirmed by the occurrence or non-occurrence
of one or more uncertain future events that are not completely within
the control of the entity or a liability which does not satisfy
the recognition criteria (p. 869).
Coupon rate (nominal or stated rate): The interest rate stated
as a percentage of nominal value and used to determine the interest
paid periodically to the debenture holder (p. 883).
Current liability: A liability that is expected to be paid
within the operating cycle or 1 year of the reporting date (p. 871).
Debentures (or bonds): A liability representing a written promise
to pay a principal amount at a specified time, as well as interest
on the principal at a specified rate per period (pp. 881, 882).
Defeasance: An arrangement whereby the terms and conditions
of a debt are avoided or defeated (p. 885).
Discount (in relation to bills of exchange): Interest deducted
in advance, in practice at the effective interest rate or yield
(p. 873).
Discount (on debentures): The amount by which the issue price
of a debenture is below the nominal value (p. 883).
Employee benefits: All forms of consideration that employees
accumulate as a result of rendering services to their employer;
these considerations include wages and salaries (including all monetary
and non-monetary fringe benefits), annual leave, sick leave, long-service
leave, superannuation, and post-employment benefits (p. 875).
Finance lease: A lease agreement whereby substantially all
the benefits and risks of ownership of the leased property are transferred
to the lessee (p. 887).
Financial stability ratios: Ratios used to analyse the ability
of an entity to continue operations in the long term and to satisfy
long-term commitments while having sufficient working capital (p.
890).
Gearing (or leverage): The use of borrowed funds that have
a fixed cost to earn a higher rate of return after tax for the purpose
of increasing the earnings per share of the owners (p. 888).
Gross pay (gross earnings): The total amount of an employee's
wages or salary before any payroll deductions (p. 875).
Lease: A rental agreement in which the lessee obtains from
the lessor the right to use property for a stated period of time
(p. 886).
Liabilities: Future sacrifices of economic benefits that
an entity is at present obliged to make to other entities as a result
of past transactions or events (p. 866).
Liquidity ratios: Ratios which provide a measure of an entity's
ability to pay its short-term obligations, and meet unexpected demands
on cash resources (p. 889).
Long-service leave: Paid leave granted to employees who have
remained with the same employer over an extended period of time
(p. 879).
Maturity date: The date on which a bill or debenture is due
for payment (p. 882).
Mortgage: A legal document setting forth the specific assets
serving as collateral for a loan (p. 885).
Mortgage debenture: A debenture in which land held by the
company is mortgaged as security for the debenture (p. 883).
Mortgage payable: A liability in which specific property
of the borrower serves as collateral for a loan (p. 881).
Net pay (net earnings): Gross pay of an employee less deductions
(p. 876).
Nominal value (face value, principal): The amount due to a lender
when a debt under debentures or unsecured notes matures (p. 882).
Non-current liability: A liability that is expected to be
paid beyond the current operating cycle or 1 year of the reporting
date (p. 871).
Operating lease: A lease which is not a finance lease (p.
887).
Premium (on debentures): The price in excess of nominal value
on issue of debentures (p. 883).
Present value: The single value at the present time of cash
flows expected to be received or paid in the future which have been
discounted at an appropriate rate of discount (p. 875).
Provisions: Liabilities for which the amount or timing of
the future sacrifice of economic resources is uncertain (p. 868).
Redemption by sinking fund: The redemption of long-term debt
by way of establishing a fund which will be used to pay the debt's
obligations on maturity (p. 885).
Salary: Remuneration on a weekly, fortnightly or monthly
basis paid to an employee, usually a fixed amount regardless of
hours worked (p. 875).
Term loan: A borrowing from a bank, life insurance company,
and other financial institutions for periods of 1 to 10 years, usually
at a fixed interest rate (p. 881).
Trade creditors: Another term for accounts payable (p. 872).
Trust deed: A document setting down the terms of a debenture
agreement and the appointment of a trustee (p. 882).
Trustee: A third party appointed to represent debenture holders
(p. 882).
Unsecured note: A borrowing with no security against the
general assets of the borrower (p. 883).
Wages: Remuneration calculated on an hourly rate paid to
an employee (p. 875).
Workers compensation: An insurance scheme imposed by law
whereby the employer purchases insurance which may be used to compensate
employees for job-related injuries and consequential loss of wages
through loss of work (p. 878).
CHAPTER 23
Annual financial report: The statements of financial performance,
financial position and cash flows, appropriate notes and a directors'
declaration presented to a company's shareholders at the end of
the financial year (p. 908).
Concise report: A summarised set of financial reports plus
directors' and auditor's reports sent to shareholders as an alternative
to the full annual financial report (p. 909).
Disclosing entity: An entity, which may or may not be incorporated,
which has 'enhanced disclosure' securities (p. 910).
Extraordinary items: Items of revenue and expense which are
attributable to transactions or other events outside the ordinary
activities of the entity and which are not of a recurring nature
(p. 914).
Fundamental error: A material error discovered in the current
reporting period such that the financial report of one or more previous
reporting periods cannot now be considered to have been reliable
at the dates of their issue (p. 922).
Half-year financial reports: A set of half-yearly statements,
including a statement of financial performance, a statement of financial
position, a statement of cash flows and selected explanatory notes,
to be prepared by a disclosing entity (p. 910).
Ordinary activities: Those activities undertaken by the entity
to meet its objectives, including related activities in which the
entity engages which are in furtherance of, incidental to or arising
from activities undertaken to meet its objectives (p. 914).
Qualifying asset: An asset that necessarily takes a substantial
period of time to get ready for its intended use or sale (p. 913).
CHAPTER 24
Cash: Cash on hand and cash equivalents (p. 942).
Cash equivalents: Highly liquid investments which are readily
convertible to cash at an entity's option and which are subject
to an insignificant risk of changes in value, and borrowings which
are integral to the entity's cash management function and which
are not subject to a term facility (p. 942).
Cash flows: Cash inflows and cash outflows from transactions
external to the entity (p. 940).
Cash on hand: Notes, coins, and deposits held at call with
financial institutions (p. 942).
Direct method: A method used in determining cash flows from
operating activities by which each accrual-basis revenue and expense
is adjusted to arrive at cash receipts from customers and payments
to suppliers and employees. The method produces gross inflows and
outflows for operating activities (p. 949).
Financing activities: Activities which relate to changes
in the size and composition of the financial structure of an entity,
i.e. equity and borrowings which are not part of the definition
of cash (p. 944).
Indirect method: A method used in determining cash flows
from operating activities by which accrual-basis operating profit
(after tax, if applicable) is converted to net cash provided by
operating activities by adjusting the profit for non-cash revenues
and expenses and changes in relevant current assets and liabilities
(p. 949).
Investing activities: Activities which relate to the purchasing
and selling of non-current assets, and to the purchasing and selling
of investments (e.g. shares) which are not part of the definition
of cash (p. 944).
Non-cash transactions and events: Transactions and events
affecting assets and liabilities which have been recognised during
the reporting period but have not resulted in cash flows, and involve
parties external to the entity (p. 959).
Operating activities: Activities which relate to the provision
of goods and services, and other activities that are neither financing
nor investing activities (p. 943).
Statement of cash flows: A statement containing information
about an entity's cash inflows and cash outflows, appropriately
classified, during a reporting period, providing users with relevant
information about the operating, investing and financing activities
of the entity (p. 940).
CHAPTER 25
Cash flow efficiency: The efficiency with which the entity
generates cash from its revenues, profits and assets (p. 1019).
Cash sufficiency: The adequacy of the cash flows to meet
the entity's cash needs for long-term debt payments, dividends,
and acquisition of non-current assets (p. 1019).
Common size statement: A financial statement in which the
amount of each item reported in the statement is stated as a percentage
of some specific base amount also reported in the same statement
(p. 1008).
Comparative statements: Financial statements for the current
year and previous years presented together to facilitate the analysis
of changes in statement items (p. 1007).
Financial stability: An entity's ability to continue operating
in the future and to satisfy its long-term cash obligations (p.
1005).
Gearing (leverage): The use of borrowed funds to earn a return
greater than interest or dividends paid to creditors and preference
shareholders respectively (p. 1010).
Horizontal analysis: That part of an analysis based on the
comparison of amounts reported for the same item in two or more
comparative statements with an emphasis on the change from year
to year (p. 1007).
Liquidity (solvency): An entity's ability to satisfy its
short-term obligations (p. 1004).
Ratio: Division of the amount reported for one financial
statement item by the amount reported for another. Ratio analysis
is the evaluation of the relationship indicated by this division
(p. 1008).
Vertical analysis: That part of an analysis in which the
focus of the study is on the proportion of individual items expressed
as a percentage of some specific item reported in the same statement
(p. 1008). (See also Common size statement.)
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