Accounting and Auditing Glossary

Account

Formal record that represents, in words, money or other unit of measurement, certain resources, claims to such resources, transactions or other events that result in changes to those resources and claims.

Account payable

Amount owed to a creditor for delivered goods or completed services.

Account receivable

Claim against a debtor for an uncollected amount, generally from a completed transaction of sales or services rendered.

Accountants’ report

Formal document that communicates an independent accountant’s (1) expression of limited assurance on financial statements as a result of performing inquiry and analytic procedures (Review Report); (2) results of procedures performed (type of Attestation Report); (3) non-expression of opinion or any form of assurance on a presentation in the form of financial statements information that is the representation of management (Compilation Report); or (4) an opinion on an assertion made by management in accordance with the Statements on Standards for Attestation Engagements (Attestation Report). An accountant’s report does not result from the performance of an audit.

Accounting

Recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statements.

Accounting change

Change in (1) an accounting principle; (2) an accounting estimate; or (3) the reporting entity. The correction of an error in previously issued financial statements is not an accounting change.

Accrual basis

Method of accounting that recognizes revenue when earned, rather than when collected. Expenses are recognized when incurred rather than when paid.

Accrued expense

An expense incurred during an accounting period for which payment is not due until a later accounting period. This results from the purchase of services which at the time of accounting have only been partly performed, are not yet billable, or have not been paid for.

Accumulated depreciation

Total depreciation pertaining to an asset or group of assets from the time the assets were placed in service until the date of the financial statement or tax return. This total is the contra account to the related asset account.

Additional paid in capital

Amounts paid for stock in excess of its par value or stated value. Also, other amounts paid by stockholders and charged to equity accounts other than capital stock.

Adjusting entries

Accounting entries made at the end of an accounting period to allocate items between accounting periods.

Amortization

The process of reducing a recognized liability systematically by recognizing revenues or by reducing a recognized asset systematically by recognizing expenses or costs. In accounting for postretirement benefits, amortization also means the systematic recognition in net periodic postretirement benefit cost over several periods of amounts previously recognized in other comprehensive income, that is, gains or losses, prior service cost or credits, and any transition obligation or asset.

Analytical procedures

Substantive tests of financial information which examine relationships among data as a means of obtaining evidence. Such procedures include (1) comparison of financial information with information of comparable prior periods; (2) comparison of financial information with anticipated results (e.g., forecasts); (3) study of relationships between elements of financial information that should conform to predictable patterns based on the entity’s experience; and (4) comparison of financial information with industry norms.

Annual report

The annual report to shareholders is the principal document used by most public companies to disclose corporate information to their shareholders. It is usually a state-of-the-company report, including an opening letter from the Chief Executive Officer, financial data, results of continuing operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs. The Form 10-K, which must be filed with the SEC, typically contains more detailed information about the company’s financial condition than the annual report.

Assertion

Explicit or implicit representations by an entity’s management that are embodied in financial statement components and for which the auditor obtains and evaluates evidential matter when forming his/her opinion on the entity’s financial statements.

Audit risk

The risk that the auditor may unknowingly fail to modify appropriately his/her opinion on financial statements that are materially misstated.

Audit sampling

Application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.

Auditors’ report

Written communication issued by an independent certified public accountant (CPA) describing the character of his/her work and the degree of responsibility taken. An auditor’s report includes a statement that the audit was conducted in accordance with generally accepted auditing standards (GAAS), which require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, as well as a statement that the auditor believes the audit provides a reasonable basis for his/her opinion.

Bad debt

All or portion of an account, loan, or note receivable considered to be uncollectible.

Balance sheet

Basic financial statement, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities, and the equity of its owners. Also known as a statement of financial condition.

Bond

One type of long-term promissory note, frequently issued to the public as a security regulated under federal securities laws or state blue sky laws. Bonds can either be registered in the owner’s name or are issued as bearer instruments.

Book value

Amount, net or contra account balances, that an asset or liability shows on the balance sheet of a company. Also known as carrying value.

Business combinations

Combining of two entities. Under the purchase method of accounting, one entity is deemed to acquire another and there is a new basis of accounting for the assets and liabilities of the acquired company.

Business segment

Any division of an organization authorized to operate, within prescribed or otherwise established limitations, under substantial control by its own management.

Capital stock

Ownership shares of a corporation authorized by its articles of incorporation. The money value assigned to a corporation’s issued shares. The balance sheet account with the aggregate amount of the par value or stated value of all stock issued by a corporation.

Capitalized cost

Expenditure identified with goods or services acquired and measured by the amount of cash paid or the market value of other property, capital stock, or services surrendered. Expenditures that are written off during two or more accounting periods.

Carrying value

Amount, net or contra account balances, that an asset or liability shows on the balance sheet of a company. Also known as book value.

Cash basis

A special purpose framework in which revenues and expenditures are recorded when they are received and paid.

Cash equivalents

Short-term (generally less than three months), highly liquid investments that are convertible to known amounts of cash.

Cash flows

Net of cash receipts and cash disbursements relating to a particular activity during a specified accounting period.

Casualty loss

Sudden property loss caused by theft, accident, or natural causes.

Change in engagement

A request, before the completion of the audit (review), to change the engagement to a review or compilation (compilation) of financial statements.

Class actions

A federal securities class action is a court action filed on behalf of a group of shareholders under Rule 23 of the Federal Rules of Civil Procedure. Instead of each shareholder bringing an individual lawsuit, one or more shareholders bring a class action for the entire class of shareholders.

Common stock

Capital stock having no preferences generally in terms of dividends, voting rights, or distributions.

Companies, going public

Companies become public entities for different reasons, but usually to raise additional capital. The SEC has prepared a guide for companies – Q&A: Small Business and the SEC – that provides a basic understanding about the various ways companies can become public and what securities laws apply. The SEC also has a list of some of the registration and reporting forms and related regulations that pertain to small and large companies.

Comparative financial statement

Financial statement presentation in which the current amounts and the corresponding amounts for previous periods or dates also are shown.

Compilation

Presentation in the form of financial statements information that is the representation of management (owners) without the accountant’s assurance as to conformity with generally accepted accounting principles (GAAP).

Comprehensive income

Change in equity of a business entity during a period from transactions and other events and circumstances from nonowner sources. The period includes all changes in equity except those resulting from investments by owners and distributions to owners.

Confirmation

Auditor’s receipt of a written or oral response from an independent third party verifying the accuracy of information requested.

Consolidated financial statements

Combined financial statements of a parent company and one or more of its subsidiaries as one economic unit.

Consolidation

The presentation of a single set of amounts for an entire reporting entity. Consolidation requires elimination of intra-entity transactions and balances.

Contingent liability

Potential liability arising from a past transaction or a subsequent event.

Continuing accountant

An accountant who has been engaged to audit, review, or compile and report on the financial statements of the current period and one or more consecutive periods immediately prior to the current period.

Control risk

Measure of risk that errors exceeding a tolerable amount will not be prevented or detected by an entity’s internal controls.

Controls tests

Tests directed toward the design or operation of an internal control structure policy or procedure to assess its effectiveness in preventing or detecting material misstatements in a financial report.

Current asset

Asset that one can reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle, or within a year if more than one cycle is completed each year.

Current liability

Obligation whose liquidation is expected to require the use of existing resources classified as current assets, or the creation of other current liabilities.

Current value

(1) Value of an asset at the present time as compared with the asset’s historical cost. (2) In finance, the amount determined by discounting the future revenue stream of an asset using compound interest principles.

Debt

General name for money, notes, bonds, goods, or services which represent amounts owed.

Definite criteria

A special purpose framework using a definite set of criteria having substantial support that is applied to all material items appearing in financial statements, such as the price-level basis of accounting.

Depreciation

Expense allowance made for wear and tear on an asset over its estimated useful life.

Derivatives

Derivatives are financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index. For example, a stock option is a derivative because its value changes in relation to the price movement of the underlying stock.

Detection risk

Risk that the auditor will not detect a material misstatement.

Disclosure

Process of divulging accounting information so that the content of financial statements is understood.

Discount

Reduction from the full amount of a price or debt.

Dividends

Distribution of earnings to owners of a corporation in cash, other assets of the corporation, or the corporation’s capital stock.

Earnings per share (EPS)

The amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share.

Employee stock options plans

An employee stock ownership plan is an employee benefit plan that is described by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of 1986 as a stock bonus plan, or combination stock bonus and money purchase pension plan, designed to invest primarily in employer stock. Also called an employee share ownership plan. Employee Stock Options Plans should not be confused with the term “ESOPs,” or Employee Stock Ownership Plans, which are retirement plans.

Employee stock ownership plans (ESOPs)

An employee stock ownership plan (ESOP) is a retirement plan in which the company contributes its stock to the plan for the benefit of the company’s employees. With an ESOP, you never buy or hold the stock directly. This type of plan should not be confused with employee stock options plans, which are not retirement plans. Instead, employee stock options plans give the employee the right to buy their company’s stock at a set price within a certain period of time.

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities. Also, the amount of a business’ total assets, less total liabilities. Also, the third section of a balance sheet, the other two being assets and liabilities.

Equity security

Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, and call options) or dispose of (for example, put options) an ownership interest in an entity at fixed or determinable prices. However, the term does not include convertible debt or preferred stock that by its terms either must be redeemed by the issuing entity or is redeemable at the option of the investor.

Error

Act that departs from what should be done; imprudent deviation, unintentional mistake or omission.

Executive compensation: Where to find in SEC reports

The federal securities laws require clear, concise and understandable disclosure about compensation paid to CEOs and certain other high-ranking executive officers of public companies. You can locate information about executive pay in (1) the company’s annual proxy statement; (2) the company’s annual report on Form 10-K; and (3) registration statements filed by the company to register securities for sale to the public.

Expenditures

Expenditures to which capitalization rates are to be applied are capitalized expenditures (net of progress payment collections) for the qualifying asset that have required the payment of cash, the transfer of other assets, or the incurring of a liability on which interest is recognized (in contrast to liabilities, such as trade payables, accruals, and retainages on which interest is not recognized).

Extraordinary items

Events and transactions distinguished by their unusual nature and by the infrequency of their occurrence. Extraordinary items are reported separately, less applicable income taxes, in the entity’s statement of income or operations.

Fair disclosure, regulation FD

On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities – generally, securities market professionals, such as stock analysts, or holders of the issuer’s securities who may well trade on the basis of the information – the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.

Fair market value

Price at which property would change hands between a buyer and a seller without any compulsion to buy or sell.

Federal securities laws

The laws that govern the securities industry, include the Securities Act of 1933; Securities Exchange Act of 1934; Investment Company Act of 1940; Investment Advisers Act of 1940; and Public Utility Holding Company Act of 1935.

Financial statements

Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.

First in, first out (FIFO)

Accounting method of valuing inventory under which the costs of the first goods acquired are the first costs charged to expense. Commonly known as FIFO.

Fiscal year

Period of 12 consecutive months chosen by an entity as its accounting period which may or may not be a calendar year.

Fixed asset

Any tangible asset with a life of more than one year used in an entity’s operations.

Foreign currency translation

Restating foreign currency in equivalent dollars; unrealized gains or losses are postponed and carried in Stockholder’s Equity until the foreign operation is substantially liquidated.

Form 10-K

This is the report that most publicly traded companies file with the SEC on an annual basis. It provides a comprehensive overview of the company’s business and financial condition. Some companies choose to send their Form 10-K to their shareholders instead of sending a separate annual report. Currently, Form 10-K must be filed with the SEC within 90 days after the end of the company’s fiscal year.

Form 10-Q

The Form 10-Q is a report filed quarterly by most reporting companies. It includes unaudited financial statements and provides a continuing view of the company’s financial position during the year. The report must be filed for each of the first three fiscal quarters of the company’s fiscal year and is currently due within 45 days of the close of the quarter. In addition to Form 10-Q, companies provide annual reports to their shareholders and file Form 10-K on an annual basis with the SEC.

Form 8-K

This is the “current report” used to report material events or corporate changes that have previously not been reported by the company in a quarterly report (Form 10-Q) or annual report (Form 10-K).

Forms 3, 4, 5

Corporate insiders-meaning a company’s officers and directors, and any beneficial owners of more than 10% of a class of the company’s equity securities registered under Section 12 of the Securities Exchange Act of 1934 – must file with the SEC a statement of ownership regarding those securities. The initial filing is on Form 3. Changes in ownership are reported on Form 4. Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting.

Fraud

Willful misrepresentation by one person of a fact inflicting damage on another person.

Gain

Excess of revenues received over costs relating to a specific transaction.

General ledger

Collection of all assets, liability, owners’ equity, revenue, and expense accounts.

Generally accepted accounting principles (GAAP)

Conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The highest level of such principles is set by the Financial Accounting Standards Board (FASB).

Generally accepted auditing standards (GAAS)

Standards set by the American Institute of Certified Public Accountants (AICPA) which concern the auditor’s professional qualities and judgment in the performance of his/her audit and in the actual report.

Going concern

Assumption that a business can remain in operation long enough for all of its current plans to be carried out.

Going private

A company “goes private” when it reduces the number of its shareholders to fewer than 300 and is no longer required to file reports with the SEC.

Goodwill

An asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not for profit entity that are not individually identified and separately recognized.

Gross income

A tax term meaning all income from whatever source derived, except as otherwise provided in the income tax code.

Guaranty

Legal arrangement involving a promise by one person to perform the obligations of a second person to a third person, in the event the second person fails to perform.

Hedges

Protect an entity against the risk of adverse price or interest-rate movements on its assets, liabilities, or anticipated transactions. A hedge is used to avoid or reduce risks by creating a relationship by which losses on positions are counterbalanced by gains on separate positions in another market.

Historical cost

The generally accepted method of accounting used in the primary financial statements that is based on measures of historical prices without restatement into units, each of which has the same general purchasing power.

Income

Inflow of revenue during a period of time.

Income statement

Summary of the effect of revenues and expenses over a period of time.

Income tax basis

A special purpose framework that the reporting entity uses or expects to use to file its income tax return for the period covered by the financial statements.

Initial public offerings (IPO)

IPO stands for initial public offering and occurs when a company first sells its shares to the public.

Initial public offerings, lockup agreements

Lockup agreements prohibit company insiders – including employees, their friends and family, and venture capitalists – from selling their shares for a set period of time. In other words, the shares are “locked up.” Before a company goes public, the company and its underwriter typically enter into a lockup agreement to ensure that shares owned by these insiders do not enter the public market too soon after the offering.

Insider trading

“Insider trading” actually includes both legal and illegal conduct. The legal version is when corporate insiders – officers, directors, and employees – buy and sell stock in their own companies. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

Intangible asset

Asset having no physical existence such as trademarks and patents.

Interest

Payment for the use or forbearance of money.

Interim financial statements

Financial statements that report the operations of an entity for less than one year.

Internal control

Process designed to provide reasonable assurance regarding achievement of various management objectives such as the reliability of financial reports.

Inventory

Tangible property held for sale, or materials used in a production process to make a product.

Investment

Expenditure used to purchase goods or services that could produce a return to the investor.

Journal

Any book containing original entries of daily financial transactions.

Last in, first out (LIFO)

Accounting method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense. Commonly known as LIFO.

Lease

Conveyance of land, buildings, equipment, or other assets from one person (Lessor) to another (Lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.

Leasehold

Property interest a lessee owns in the leased property.

Ledger

Any book of accounts containing the summaries of debit and credit entries.

Lessee

Person or entity that has the right to use property under the terms of a lease.

Lessor

Owner of property, the temporary use of which is transferred to another (lessee) under the terms of a lease.

Liability

Debts or obligations owed by one entity (Debtor) to another entity (Creditor) payable in money, goods, or services.

Listing and delisting requirements

Before a company can begin trading on an exchange or the Nasdaq Stock Market, it must meet certain initial requirements or “listing standards.” The exchanges and the Nasdaq Stock Market set their own standards for listing and continuing to trade. The SEC does not set listing standards. The initial listing requirements mandate that a company meet specified minimum thresholds for the number of publicly traded shares, total market value, stock price, and number of shareholders. After a company starts trading, it must continue to meet different standards set by the exchanges or the Nasdaq Stock Market. Otherwise, the company can be delisted. These continuing standards usually are less stringent than the initial listing requirements.

Long-term debt

Debt with a maturity of more than one year from the current date.

Loss

Excess of expenditures over revenue for a period or activity. Also, for tax purposes, an excess of basis over the amount realized in a transaction.

Lower of cost or market

Valuing assets for financial reporting purposes. Ordinarily, “cost” is the purchase price of the asset and “market” refers to its current replacement cost. Generally accepted accounting principles (GAAP) requires that certain assets (e.g., inventories) be carried at the lower of cost or market.

Management discussion and analysis (MD&A)

SEC requirement in financial reporting for an explanation by management of significant changes in operations, assets, and liquidity.

Manipulation

Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices, or trades to create a false or deceptive picture of the demand for a security.

Marketable securities

Stocks and other negotiable instruments which can be easily bought and sold on either listed exchanges or over-the-counter markets.

Mark-to-market

Method of valuing assets that results in adjustment of an asset’s carrying amount to its market value.

Matching principle

The concept that all costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues.

Materiality

Magnitude of an omission or misstatements of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would change or be influenced.

Mergers

Mergers are business transactions involving the combination of two or more companies into a single entity. Most state laws require that mergers be approved by at least a majority of the company’s shareholders if the merger will have a significant impact on the company.

Modified cash basis

A special purpose framework that begins with the cash basis method (see Cash basis) and applies modifications having substantial support, such as recording depreciation on fixed assets or accruing income taxes.

Nasdaq

Nasdaq stands for the National Association of Securities Dealers Automated Quotation System. Unlike the New York Stock Exchange where trades take place on an exchange, Nasdaq is an electronic stock market that uses a computerized system to provide brokers and dealers with price quotes. The National Association of Securities Dealers, Inc. owns and operates The Nasdaq Stock Market.

Net assets

Excess of the value of securities owned, cash, receivables, and other assets over the liabilities of the company.

Net income

Excess or deficit of total revenues and gains compared with total expenses and losses for an accounting period.

Net sales

Sales at gross invoice amounts less any adjustments for returns, allowances, or discounts taken.

Net worth

Similar to equity, the excess of assets over liabilities.

Nonpublic entity

Any entity other than (a) one whose securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally; (b) one that makes a filing with a regulatory agency in preparation for the sale of any class of its securities in a public market; or (c) a subsidiary, corporate joint venture, or other entity controlled by an entity covered by (a) or (b).

No-par stock

Stock authorized to be issued but for which no par value is set in the articles of incorporation. A stated value is set by the board of directors on the issuance of this type of stock.

No-par value

Stock or bond that does not have a specific value indicated.

Notional

Value assigned to assets or liabilities that is not based on cost or market (e.g., the value of a service not yet rendered).

Objectivity

Emphasizing or expressing the nature of reality as it is apart from personal reflection or feelings; independence of mind.

Paid in capital

Portion of the stockholders’ equity which was paid in by the stockholders, as opposed to capital arising from profitable operations.

Par value

Amount per share set in the articles of incorporation of a corporation to be entered in the capital stocks account where it is left permanently and signifies a cushion of equity capital for the protection of creditors.

Parent company

Company that has a controlling interest in the common stock of another.

Predecessor accountant

An accountant who (a) has reported on the most recent compiled or reviewed financial statements or was engaged to perform but did not complete a compilation or review of the financial statements, and (b) has resigned, declined to stand for reappointment, or been notified that his or her services have been or may be terminated.

Preferred stock

Type of capital stock that carries certain preferences over common stock, such as a prior claim on dividends and assets.

Premium

(1) Excess amount paid for a bond over its face amount. (2) In insurance, the cost of specified coverage for a designated period of time.

Prepaid expense

Cost incurred to acquire economically useful goods or services that are expected to be consumed in the revenue-earning process within the operating cycle.

Prescribed form

Any standard preprinted form designed or adopted by the body to which it is to be submitted, for example, forms used by industry trade associations, credit agencies, banks, and governmental and regulatory bodies other than those concerned with the sale or trading of securities. A form designed or adopted by the entity whose financial statements are to be compiled is not considered to be a prescribed form.

Present value

Current value of a given future cash flow stream, discounted at a given rate.

Principal

Face amount of a security, exclusive of any premium or interest. The basis for interest computations.

Proxy statement

The SEC requires that shareholders of a company whose securities are registered under Section 12 of the Securities Exchange Act of 1934 receive a proxy statement prior to a shareholder meeting, whether an annual or special meeting. The information contained in the statement must be filed with the SEC before soliciting a shareholder vote on the election of directors and the approval of other corporate action. Solicitations, whether by management or shareholders, must disclose all important facts about the issues on which shareholders are asked to vote.

Purchase method of accounting

Accounting for a merger by adding the acquired company’s assets at the price paid for them to the acquiring company’s assets.

Quiet period

The term “quiet period,” also referred to as the “waiting period,” is not defined under the federal securities laws. The quiet period extends from the time a company files a registration statement with the SEC until SEC staff declares the registration statement “effective.” During this period, the federal securities laws limit what information a company and related parties can release to the public. Rule 134 of the Securities Act of 1933 discusses these limitations.

Ratio analysis

Comparison of actual or projected data for a particular company to other data for that company or industry in order to analyze trends or relationships.

Real property

Land and improvements, including buildings and personal property that is permanently attached to the land or customarily transferred with the land.

Receivables

Amounts of money due from customers or other debtors.

Reconciliation

Comparison of two numbers to demonstrate the basis for the difference between them.

Registration under the securities act of 1933

Often referred to as the “truth in securities” law, the Securities Act of 1933 has two basic objectives: (1) To require that investors receive financial and other significant information concerning securities being offered for public sale; and (2) To prohibit deceit, misrepresentations, and other fraud in the sale of securities. The SEC accomplishes these goals primarily by requiring that companies disclose important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company’s securities.

Regulation D offerings

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) provides three exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC.

Regulatory basis

A special purpose framework that the reporting entity uses to comply with the requirements or financial reporting provisions of a governmental regulatory agency to whose jurisdiction the entity is subject. An example is a basis of accounting insurance companies use pursuant to the rules of a state insurance commission.

Reissued report

A report issued subsequent to the date of the original report that bears the same date as the original report. A reissued report may need to be revised for the effects of specific events; in these circumstances, the report should be dual-dated with the original date and a separate date that applies to the effects of such events.

Related party transaction

Business or other transaction between persons who do not have an arm’s-length relationship (e.g., a relationship with independent, competing interests). The most common is between family members or controlled entities. For tax purposes, these types of transactions are generally subject to a greater level of scrutiny.

Research and development (R&D)

Research is a planned activity aimed at discovery of new knowledge with the hope of developing new or improved products and services. Development is the translation of research findings into a plan or design of new or improved products and services.

Retained earnings

Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.

Revenue recognition

Method of determining whether or not income has met the conditions of being earned and realized or is realizable.

Revenues

Sales of products, merchandise, and services; and earnings from interest, dividend, rents.

Review

Accounting service that provides some assurance as to the reliability of financial information. In a review, a certified public accountant (CPA) does not conduct an examination under generally accepted auditing standards (GAAS). Instead, the accountant performs inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements for them to be in conformity with GAAP or, if applicable, with a special purpose framework.

Risk management

Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.

Security

Any kind of transferable certificate of ownership including equity securities and debt securities.

Short-term

Current; ordinarily due within one year.

SSARS

Statements on Standards for Accounting And Review Services issued by the AICPA Accounting and Review Services Committee (ARSC).

Start-up costs

(1) Costs, excluding acquisition costs, incurred to bring a new unit into production. (2) Costs incurred to begin a business.

Statement of cash flows

A statement of cash flows is one of the basic financial statements that is required as part of a complete set of financial statements prepared in conformity with generally accepted accounting principles. It categorizes net cash provided or used during a period as operating, investing and financing activities, and reconciles beginning and ending cash and cash equivalents.

Statement of financial condition

Basic financial statement, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation as of a specified date, the entity’s assets, liabilities, and the equity of its owners. Also known as balance sheet.

Statutory basis

See Regulatory basis.

Straight-line depreciation

Accounting method that reflects an equal amount of wear and tear during each period of an asset’s useful life. For instance, the annual straight-line depreciation of a $10,000 asset expected to last ten years is $1,000.

Strike price

Price of a financial instrument at which conversion or exercise occurs.

Submission of financial statements

Presenting to a client or third party’s financial statements that the accountant has prepared either manually or through the use of computer software.

Subsequent event

Material event that occurs after the end of the accounting period and before the publication of an entity’s financial statements. Such events are disclosed in the notes to the financial statements.

Successor accountant

An accountant who has been invited to make a proposal for an engagement to compile or review financial statements and is considering accepting the engagement or an accountant who has accepted such an engagement.

Tangible asset

Assets having a physical existence, such as cash, land, buildings, machinery, or claims on property, investments or goods in process.

Tax

Charge levied by a governmental unit on income, consumption, wealth, or other basis.

Third party

All parties except for members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of the financial statements.

Trade date

Date when a security transaction is entered into, to be settled on at a later date. Transactions involving financial instruments are generally accounted for on the trade date.

Treasury bill

Short-term obligation that bears no interest and is sold at a discount.

Treasury bond

Long-term obligation that matures more than five years from issuance and bears interest.

Treasury note

Intermediate-term obligation that matures one to five years from issuance and bears interest.

Treasury stock

Stock reacquired by the issuing company. It may be held indefinitely, retired, issued upon exercise of stock options, or resold.

Trial balance

A trial balance consists of a listing of all of the general ledger accounts and their corresponding debit or credit balances. Also, in a trial balance, no attempt is made to establish a mathematical relationship among the assets, liabilities, equity, revenues, and expenses except that total debits equal total credits.

Unearned income

Payments received for services which have not yet been performed.

Updated report

A report issued by a continuing accountant that takes into consideration information that he/she becomes aware of during his/her current engagement and that re-expresses his/her previous conclusions or, depending on the circumstances, expresses different conclusions on the financial statements of a prior period as of the date of his/her current report.

Valuation allowance

Method of lowering or raising an object’s current value by adjusting its acquisition cost to reflect its market value by use of a contra account.

Variance

Deviation or difference between an estimated value and the actual value.

Work in progress

Inventory account consisting of partially completed goods awaiting completion and transfer to finished inventory.

Working capital

Excess of current assets over current liabilities.

Working papers

(1) Records kept by the auditor of the procedures applied, the tests performed, the information obtained, and the pertinent conclusions reached in the course of the audit. (2) Any records developed by a certified public accountant (CPA) during an audit.

Yield

Return on an investment an investor receives from dividends or interest expressed as a percentage of the cost of the security.