Important Short Notes

Allowance method: A method of estimating uncollectible accounts receivable whereby bad debt expense is recorded in the same period as the sale to obtain a proper matching of expense and revenues and to achieve a proper carrying value for accounts receivable.

Bank reconciliation statement: A schedule that explains any differences between the bank’s and the company’s records of cash.

Cash discounts: Sales discounts that are offered to induce prompt payment.

Cash dividends: A dividend paid to shareholders in cash.

Cash flows: The inflows and outflows of cash and cash equivalents.

Conceptual framework: A conceptual framework deals with fundamental financial reporting issues such as the objectives and users of financial statements, the characteristics that make accounting information useful, the basic elements of financial statements (e.g., assets, liabilities, equity, income, and expenses), and the concepts for recognizing and measuring these elements in the financial statements.

Conservatism: A constraint of financial reporting that means when in doubt choose the solution that will least likely overstate assets and income.

Consistency: It states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods.

Current asset: A balance sheet account that represents the value of all assets that can reasonably expected to be converted into cash within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.

Current liability: A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

Depreciation: A method of allocating the cost of a fixed asset such as machine, building over its useful life. For accounting purposes, depreciation indicates how much of an asset's value has been used up.

Direct write-off method: A method for recording uncollectible accounts receivable where no entry is made until a specific account has definitely been established as uncollectible.

Earnings per share (EPS): The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.

Feedback value: The notion that relevant information helps users confirm or correct prior expectations.

First-in, first-out (FIFO) method: The first in, first out (FIFO) method of inventory valuation is a cost flow assumption that the first goods purchased are also the first goods sold.

Income statement: A financial statement that measures the results of operations during the period.

Inventories: Asset items held for sale in the ordinary course of business, or goods that will be used or consumed in the production of goods to be sold.

Last in, first out (LIFO) method: The last in, first out (LIFO) method operates under the assumption that the last item of inventory purchased is the first one sold.

Materiality: The constraint that relates to an item’s impact on a firm’s overall financial operations. An item is material if its inclusion or omission would influence or change the judgment of a reasonable person.

Merchandise inventory: Inventory that is purchased in a form ready for sale.

Relevance: A qualitative characteristic of accounting information that indicates that it must make a difference in a decision.

Reliability: It refers to the trustworthiness of the financial statements.

Salvage value: Salvage value is the estimated resale value of an asset at the end of its useful life. Salvage value is subtracted from the cost of a fixed asset to determine the amount of the asset cost that will be depreciated. Thus, salvage value is used as a component of the depreciation calculation.

Trade discount: A trade discount is a reduction to the published price of a product.