"CLEP Financial Accounting," Vocabulary from Chapter 18

This list focuses on long-term liabilities.

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Full list of words from this list:

words only definitions & notes
  1. bond
    a certificate of debt issued by a government or corporation
  2. certificate
    a formal documentation of a fact of relevance to finance
  3. quote
    name the price of
  4. negative
    less than zero
  5. liability
    an obligation to pay money to another party
  6. credit
    an accounting entry acknowledging income or capital items
  7. revenue
    the entire amount of income before any deductions are made
  8. discount
    an amount or percentage deducted
  9. maturity
    the date on which an obligation must be repaid
  10. corporation
    a business firm recognized by law as a single body
  11. premium
    the amount that something is valued above its nominal value
  12. excess
    a quantity much larger than is needed
  13. underwrite
    guarantee financial support of
  14. contract
    a binding agreement that is enforceable by law
  15. fluctuate
    be unstable
  16. negotiable
    legally transferable to the ownership of another
  17. frequency
    the number of occurrences within a given time period
  18. extend
    prolong the time allowed for payment of
  19. impact
    a forceful consequence; a strong effect
  20. gradual
    proceeding in small stages
    Over the life of bonds, the book value gradually approaches the face amount. This is logical because, on the maturity date, the company owes the face amount whether the bonds were issued at a discount or a premium. So the book value (and interest expense) of bonds issued at a premium gradually goes down, and the book value (and interest expense) of bonds issued at a discount gradually goes up.
  21. issue
    bring out for public distribution or sale
    The CLEP test will try to trick you into thinking that the bond issuance costs should reduce the premium or increase the discount and thus spread over the life of the bond. However, the bond issuance cost is always expensed in the year the bonds are issued.
  22. periodic
    happening or recurring at regular intervals
    Beware when the CLEP exam refers to the periodic cash payment of a bond as an "interest payment." Remember that this "interest payment" does not represent interest expense.
  23. defer
    hold back to a later time
    Remember that every account beginning with the word "deferred" is a liability account (even if it ends with the word "revenue").
  24. formula
    a statement expressing some fundamental principle
    --face amount of bond + premium (or - discount) = bond book value
    --face amount of bond x face rate of bond x fraction of year = cash payment
    --book value of bond x market rate x fraction of year = interest expense
    --amount investors pay for bond divided by face amount of bond = quoted price stated as a percent, but without the % sign
  25. clue
    evidence that helps to solve a problem
    CLEP test-takers will not need to crunch bond math. Questions involving bonds provide the key information. However, you will need to understand the relationships among all these numbers. A simple way to remember whether lenders pay a premium or a discount: People pay more for something better. If your bond has a higher than market interest rate, people will pay a premium for it.
Created on November 2, 2016 (updated December 15, 2016)

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