accelerated

cost recovery Adaptation of the decliningbalance depreciation method introduced for tax
system
purposes in 1981 and subsequently modified.
(ACRS)
accelerated Method of computing depreciation that yields higher annual depreciation in the
depreciation early years of an asset s life than in later years.
amortization (1) The process of allocating the cost of intangible assets to periodic expense. (2)
An adjustment to interest expense (for either a premium or a discount) to reflect
the effective interest being incurred on bonds. This periodic adjustment results in
the convergence of the carrying value of a bond to its face value over time.
book value

The longterm asset cost remaining to be allocated to future periods; computed as

historical cost less accumulated depreciation.

composite
Computation of depreciation on an entire group of related but dissimilar assets as
depreciation if the group were one asset.
declining
Computation of periodic depreciation expense with a decreasing amount of
balance
depreciation recognized in each successive period, based on depreciation of a
depreciation fixed percentage of a declining book value.
depletion

Process of allocating the cost of mineral and other natural resource assets to
periodic expense.

depreciation Process of allocating the cost of tangible longterm assets to periodic expense.
double
declining
Computation of periodic depreciation expense with depreciation equal to double
balance
the straightline rate multiplied by a declining book value.
depreciation
gain

Amount by which the proceeds from disposing of an asset exceed the book value
of the asset.

group
Computation of depreciation on an entire group of similar assets as if the group
depreciation were one asset.
halfyear
convention

Assumption sometimes used in computing depreciation; onehalf of a years

depreciation is recognized for assets acquired or disposed of during a year.

impairment

Reduction in the expected cash flow to be generated by a longterm asset

sufficient to warrant reducing the recorded value of the asset.

indicated
gain

The excess of the market value over the book value of the asset given up in an
exchange of assets.

indicated
loss

The excess of the book value over the market value of the asset given up in an
exchange of assets.

loss

Amount by which the proceeds from disposing of an asset are less than the book
value of the asset.

modified

Modification of the ACRS tax depreciation method that is based on declining

accelerated balance depreciation, fixed cost recovery periods, and no residual values.
cost recovery
system
(MACRS)

Glossary
Chapter 10
additions

Enlargements and extensions of existing facilities.

asset
retirement
obligation

Obligation incurred in the act of acquiring a longterm operating asset to

restore costs in the future when the asset is retired. Required to be
recognized at its estimated fair value when it is incurred and be added to the
cost of acquiring the longterm operating asset.

bargain
purchase
option

A lease provision that allows for the purchase of a leased asset in the future
by the lessee at a price so low that the lessee is almost certain to exercise the
option.

basket
purchase

The purchase of a number of assets for one lumpsum purchase price.

betterments

Changes in assets designed to provide increased or improved services.

capitalized
interest

Interest incurred during the selfconstruction of an asset that is considered

to be part of the asset cost.

component

A portion of a property, plant, or equipment item that is separately

identifiable and for which a separate useful life can be estimated.

development Activities that involve applying research findings to develop a plan or

design for new or improved products and processes; includes the
formulation, design, and testing of products; construction of prototypes; and
operation of pilot plants.
discovery

The finding of valuable resources located on property that is already owned.

donation

The receipt of assets without being required to give goods or services in

return.

fixed asset
turnover
ratio

A ratio that uses financial statement data to roughly indicate how efficiently
a company is utilizing its property, plant, and equipment to generate sales;
computed as sales divided by net property, plant, and equipment.

full cost
method

A method of accounting developed to account for oil and gas exploratory

costs by capitalizing all exploratory costs; the reasoning is that the cost of
drilling dry wells is part of the cost of locating productive wells.

goodwill

A residual number, the value of all of the synergies of a functioning

business that cannot be specifically identified with any other intangible
factor, that is recognized only when it is purchased as part of the acquisition

of another company.
intangible
assets

Legal or economic rights controlled by a company that are expected to

generate future economic benefits.

maintenance Expenditures made to maintain plant assets in good operating condition.

noncurrent
operating
assets

Assets used in the normal course of business that are expected to have a
useful life exceeding one year, or one operating cycle, whichever is longer.

renewals

Expenditures made for overhauling plant assets.

repairs

Expenditures made to restore assets to good operating condition upon their

breakdown or to restore and replace broken parts.

replacements Expenditures to purchase substitutions of parts or entire units of plant assets.

research

Investigation to discover new knowledge that will be useful in developing

new products, services, or processes or that will result in significant
improvements of existing products or processes.

research and Activities undertaken to discover new knowledge or apply research findings
development in developing new products, services, processes, or significant
(R&D)
improvements of existing ones and to formulate, design, and test products;
construct prototypes; and operate pilot plants.
software
development Costs that are examined in FASB Statement No. 86
costs
successful
efforts
method

An accounting method developed to account for oil and gas exploratory

costs that expenses costs related to dry holes and capitalizes only
exploratory costs for successful wells; used by most large, successful oil
companies.

technological Stage attained in software development when an enterprise has produced

feasibility
either a detailed program design or a working model.
trademark

A distinctive name, symbol, or slogan that distinguishes a product or service

from similar products or services.

Glossary
Chapter 9
activitybased Cost system that allocates overhead based on clearly identified
cost (ABC)
characteristics of the production process that are known to create overhead
system
costs.
average cost
method

An inventory valuation method that assigns the same average cost to each
unit sold and to each item in the inventory.

ceiling

The net realizable value; used as an upper limit in defining market when
valuing inventory at the lower of cost or market.

consigned
goods

Inventory that is physically located at a dealer but whose ownership is

retained by the shipper until the dealer sells the inventory.

cost driver

Characteristic of the production process that is known to create overhead

costs.

cost
percentage

A percentage computed by dividing the goods available for sale at cost by

the goods available for sale at retail.

direct
materials

Materials used directly in the production of goods; the primary physical

materials making up the final product.

dollarvalue
LIFO

An adaptation of LIFO that measures inventory by total dollar amount

rather than by individual units. LIFO incremental layers are determined
based on total dollar changes.

dollarvalue
LIFO retail
method

A method in which LIFO layers are stated in terms of retail values.

double
extension

A technique that requires a record of baseyear prices and endofyear

prices for each individual inventory item.

entry cost

The acquisition cost of an asset.

exit value

The value received for an asset when sold.

finished goods Manufactured products for which the manufacturing process is complete.
firstin, first
An inventory valuation method that assumes that the units sold are the first
out (FIFO)
ones purchased or manufactured.
method
floor
FOB (free on
board)
destination

The net realizable value less a normal profit; used as a lower limit in
defining market when valuing inventory at the lower of cost or market.
Terms of sale under which title of goods passes to the purchaser at the
point of destination.

FOB (free on
Terms of sale under which title of goods passes to the purchaser at the
board)
point of shipment.
shipping point
foreign
currency
transaction

For a U.S. company, a transaction denominated in a currency other than

the U.S. dollar.

gross method

A method of inventory accounting that records inventory cost before

considering cash discounts.

gross profit
method

An inventory estimation technique based on the relationship between gross

profit and sales. The gross profit percentage is used to estimate cost of

goods sold, which in turn, is used to estimate the value of the inventory not
yet sold.
gross profit
percentage

Gross profit divided by sales; a measure of the profitability of sales in

relation to the cost of the goods sold.

indirect
materials

Materials that are necessary to facilitate the production process but are not
directly incorporated in the final product.

initial markup The original increase over cost.

inventory

Assets held for sale in the normal course of business; also, assets held to
be used as materials in a production process.

inventory
turnover

Measured by dividing cost of goods sold by average inventory; used to

evaluate whether the level of inventory is appropriate, given the volume of
business.

lastin, first
out (LIFO)
method

An inventory valuation method that assumes that the units sold are the
most recent ones purchased or manufactured.

LIFO
conformity
rule

A federal tax regulation that requires the use of LIFO for financial
reporting purposes if LIFO is used for income tax purposes.

LIFO layer

An incremental group of LIFO inventory items created in any year in

which the number of units purchased or produced exceeds the number
sold.

LIFO
liquidation

Reduction or elimination of old LIFO layers because total purchases or

production in the current period is less than sales.

LIFO reserve

The difference between LIFO ending inventory and the amount obtained
using another method such as FIFO or average cost.

lower of cost
or market
(LCM)

Generally accepted method for valuation of inventories in which assets are

recorded at the lower of their cost or market value; this method can be
applied to inventories on an aggregate or individual item basis.

manufacturing
All manufacturing costs other than direct materials and direct labor.
overhead
markdowns

Decreases that reduce sales prices below original retail.

market (in
The replacement cost adjusted for an upper and lower limit that reflects the
lower of cost
estimated net realizable value.
or market)
markups

Increases that raise sales prices above original retail.

net method

A method of inventory accounting that records inventory net of any cash

discounts.

number of
days sales in

Measured by dividing average inventory by average daily cost of goods

sold; used to evaluate whether the level of inventory is appropriate, given

inventory

the volume of business.

original retail

The initial sales price, including the original increase over cost referred to
as the initial markup.

periodic
inventory
system

A method of accounting for inventory in which cost of goods sold is

determined and inventory is adjusted to the proper balance at the end of
the accounting period. Purchases are recorded in the purchases account,
and ending inventory is determined by a physical count.

perpetual
inventory
system

A method of accounting for inventory in which detailed records of each

inventory purchase and sale are maintained. This system provides a current
record of inventory on hand and cost of goods sold to date.

price index

An overall measure of how much prices have increased during the year.

product
(inventoriable) Costs included in the total cost of manufactured inventory.
cost
purchase
commitment

An advance commitment to purchase inventory in the future at a set price.

raw materials

Inventory acquired by a manufacturer for use in the production process.

replacement
cost

The cost that would be required to replace an existing asset.

retail
inventory
method

An inventory method that permits the estimation of an inventory amount

without the time and expense of taking a physical inventory or maintaining
detailed perpetual inventory records.

shrinkage

The amount of inventory that is lost, stolen, or spoiled.

specific
identification
method

Inventory valuation method that assigns the actual cost of inventory items
sold to cost of goods sold.

spot rate

The exchange rate at which currencies can be traded immediately.

trade discount A reduction in the list sales price of an item to the net sales price
actually charged the customer; trade discounts are generally dependent on
the volume of business or size of order from the customer.
work in
process

Inventory of a manufacturer that is partly processed and requires further

work before it can be sold.