Allowance for bad debts

provision for possible uncollectibility associated with accounts receivable. In the balance sheet, accounts
receivable, representing gross receivables, is reduced by the allowance account to obtain net receivables-the
amount expected to be collected (realizable value). For example, if gross receivables are $100,000 and the
allowance account balance is $5000, the current asset section of the balance sheet shows:

The two ways of accounting for uncollectible accounts are the allowance method and the direct write-off
method .

Alternative Minimum Tax (AMT)

a type of flat-rate tax that applies to taxpayers who have certain types of income or deductions. A 26% or 28%
rate applies to broadly based income of individuals. A 20% rate applies to corporations. If this tax exceeds the
regular income tax, then the alternative minimum tax is to be paid instead of the regular income tax.

Amortization
gradual reduction of an amount over time. Examples are amortized expenses on limited life intangible assets
and deferred charges. Assets with limited life have to be written down over the period benefitted. The
amortization entry is to debit amortization expense and credit the intangible asset. However, unlimited life
intangibles are subject to an annual impairment test.
Amortization also refers to the reduction of debt by regular payments of interest and principal sufficient to pay
off a loan by maturity.

analysis of variances
seeking causes for variances between standard costs and actual costs; also called variance analysis. A
variance is considered favorable if actual costs are less than standard costs; it is unfavorable if actual costs
exceed standard costs. Unfavorable variances need further investigation. Analysis of variances reveals the
causes of these deviations. This feedback aids in planning future goals, controlling costs, evaluating
performance, and taking corrective action. management by exception is based on the analysis of variances,
and attention is given to only the variances that require remedial actions.

annual report
evaluation prepared by companies at the end of the reporting year which might be either on a calendar or fiscal
basis. Contained in the annual report are the company's financial statement including footnote , supplementary
schedules, management's discussion and analysis of earnings , president's letter, audit report , and other
explanatory data (e.g., research and marketing efforts) helpful in evaluating the entity's financial position and
operating performance. The annual report is read by stockholders, potential investors, creditors, employees,
regulatory bodies, and other interested financial statement users.

applied cost
one that has been assigned to a product, department, or activity. An applied cost does not have to be based on
actual costs incurred. Factory overhead applied to a product is an example of an applied cost. To apply
overhead, a predetermined overhead rate is developed; it is based on budgeted overhead and budgeted
volume of activity.

appraisal capital
very rare practice in the U.S. (more common in other countries) of writing up an asset when appraised value
exceeds book value. The entry would be to debit the asset for the increased value and credit appraisal capital,
which is a stockholders' equity account.

appraisal costs
a category of quality costs incurred to determine whether products and services are conforming to customer
requirements, such as inspection and field testing costs.

appropriated retained earnings

term used when setting aside unappropriated retained earnings , thus making them unavailable for dividends.
These appropriations might be used, for example, for plant expansion, sinking fund, and contingencies. When
the appropriation is no longer needed, it is reversed.

appropriation account
in government accounting , account of an agency that is credited when the appropriation has been authorized.
It is reduced by expenditures during the period. When a budget is adopted by the governmental unit, the entry
is to debit estimated revenues, credit appropriations, and debit or credit fund balance for the difference.

arbitrage
profiting from price differences when the same asset is traded in different markets. For example, an arbitrageur
simultaneously buys one contract of silver in the Chicago market and sells one contract of silver at a different
price in the New York market, locking in a profit if the selling price is higher than the buying price. It is also the
process of selling overvalued and buying undervalued assets so as to bring about an equilibrium where all
assets are properly valued.

assessable capital stock

 1. capital stock subject to calls and not fully paid.

2. capital stock of banks, subjecting stockholders to

liabilities in excess of the amount originally paid in or

subscribed. The assessment would occur only in cases in

which the corporation was insolvent.

asset
3. anything having commercial or exchange value that is
owned by a business, institution, or individual.

anything owned by a person or organization having monetary value, usually its cost or fair market value. An
asset may be a specific property, such as title to real estate or other tangible property, or enforceable claims
against others

asset turnover
ratio revealing the efficiency of corporate assets in generating revenue. A higher ratio is desired. What is
considered a high ratio for one industry, however, may be considered a low ratio for another industry. If there is
a low turnover, it may be an indication that the business should either utilize its assets in a more efficient
manner or sell them. Asset turnover ratios can also be calculated for specific assets such as the ratios of sales
to cash and sales to inventory. Higher ratios reflect favorably on the firm's ability to employ assets effectively.

assumptions underlying cost-volume-profit (CVP) analysis

assumptions that limit the usefulness of the basic and Cost-Volume-Profit (CVP) Analysis models. They are: (1)
The behavior of both sales revenue and expenses is linear throughout the entire relevant range of activity; (2)
There is only one product or service or a constant sales mix ; (3) Inventories do not change significantly from
period to period; (4) Volume is the only factor affecting sales and expenses.

Audit Report

short form audit report expresses the CPA's audit opinion on

whether the financial statements present fairly the client's

financial position. There are instances when a modification to

the standard two-paragraph format of the audit report is

necessary. A qualified opinion, report must be given, for

example, when audit scope limitations exist; an opinion

partly based on the report of other auditors must be noted;

the CPA wants to emphasize a key matter affecting financial

position.

long form detailed audit report directed to the management

or Board of Directors may supplement, include, or replace

the short-form report. Typically, it includes audit scope

particulars, makes explana-tory comments on financial

position and operating results, discusses trends in financial

data along with reasons, and gives procedural suggestions.

audit cycle

period of time in which the accountant conducts audit

procedures. Different parts of the audit may be carried out at
different times. For example, inventory may be counted in
November while accounts receivable confirmation may be
conducted in December. The audit cycle also relates to when
a particular business unit is examined. For instance,
Production Department X may be examined once a year,
while Production Department Y is audited biyearly.

auditing process

sequential order of steps followed by the auditor in the

examination of client records. The audit process may vary
depending upon the nature of the engagement, its objectives,
and type of audit assurance desired. The process includes
understanding the particular client's environment, conducting
 the auditing procedures and tests, appraising the audit results,
and communicating the resultsto interested parties.

authorized capital stock

maximum number of shares of common stock that can be issued under a company's Articles of Incorporation. If
a public issue of stock is involved, the SEC and the relevant state must approve it. Issued shares are usually
less than the authorized shares

average cost flow assumption

one of the two cost flow assumptions used under process costing , more often called weighted average costing
flow assumption. The other is the First-In, First-Out (FIFO) cost flow assumption.

average cost of capital

minimum desired rate of return on invested capital that is computed by taking an average of the cost of debt,
cost of preferred stock, cost of common stock, and the cost of retained earnings.

weighted average costing

procedure for computing the unit cost of a process. Beginning work-in-process inventory costs are added to the
costs of the current period, then a weighted average is obtained by dividing the combined costs by equivalent
units. Thus there is only one average cost for goods completed. Equivalent units under weighted average
costing may be computed as follows:
Units completed + (ending work-in-process ¥ degree of completion (%)).

average rate of return

a measure of an investment's profitability. Total net earnings are divided by the number of years the investment
was held, then by the investment's initial acquisition cost , to derive the annual income rate. A drawback is that
it does not consider the timing of earnings.

Example: An investment's initial cost was $100. It paid a $2 annual dividend and was sold after five years for
$150. The total return is $60 ($10 in dividends plus $50 in gain). The $60 earned over five years represents
$12 per year, which is a 12% average rate of return.

avoidable cost
cost that will not be incurred if an activity is suspended; also called escapable cost. For example, it is the cost
that can be saved by dropping a particular product line or department (e.g., salaries paid to employees working
in a particular product line or department). All costs are avoidable, except (1) sunk cost and (2) costs that will
continue regardless of the decision.