"CLEP Financial Accounting," Vocabulary from Chapter 20

This list focuses on the final word on financial statements.

Here are links to all the chapters of the test prep book published by Research & Education Association: Chapter 1, Chapter 2, Chapter 3, Chapter 4, Chapter 5, Chapter 6, Chapter 7, Chapter 8, Chapter 9, Chapter 10, Chapter 11, Chapter 12, Chapter 13, Chapter 14, Chapter 15, Chapter 16, Chapter 17, Chapter 18, Chapter 19, Chapter 20
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Full list of words from this list:

  1. benchmark
    a standard by which something can be measured or judged
  2. competitor
    the contestant you hope to defeat
  3. effect
    a phenomenon that is caused by some previous phenomenon
  4. discontinue
    put an end to a state or an activity
  5. operation
    a business especially one run on a large scale
  6. segment
    one of several parts that fit with others to make a whole
  7. associate
    make a logical or causal connection
  8. extraordinary
    far more than usual or expected
  9. infrequent
    not occurring regularly or at short intervals
  10. foreign
    relating to another place or part of the world
  11. currency
    the metal or paper medium of exchange that is presently used
  12. translation
    the act of changing in form or shape or appearance
  13. yield
    the income or profit arising from a transaction
  14. material
    things needed for doing or making something
  15. exclude
    prevent from being included or considered or accepted
  16. horizontal
    parallel to or in the plane of the horizon or a base line
    Horizontal analysis is used when a company compares its current results with those from a previous year.
  17. vertical
    at right angles to the plane of the horizon or a base line
    Vertical analysis is used when a company compares all the numbers of a financial report with a key number from the report. The key number in the income statement is always sales. The key number in the balance sheet is always total assets.
  18. allocation
    the act of distributing or apportioning according to a plan
    The CLEP exam will not ask you to calculate the income tax allocation. What you should know:
    --Income tax expense goes after income from continuing operations before income tax.
    --All other amounts reported after income from continuing operations have their share of the income tax already subtracted--that is, net of income tax.
    --The income tax effect makes both gains and losses smaller.
  19. cumulative
    increasing by successive addition
    The CLEP exam will not ask you to calculate the cumulative effect of a change in accounting method. What you should know:
    --If prior year financial statements are presented, they are restated as if the new method had been used from day one.
    --Where the cumulative effect goes on the income statement.
    --The cumulative effect is shown net of tax.
  20. creditor
    a person to whom money is owed by a debtor
    Remember that creditors are another type of investor, and interest is the equivalent of dividends to them. Adding back interest expense to net income comes up with the total profit the company earned from its assets for all investors, including creditors.
  21. guideline
    a rule that provides direction for appropriate behavior
    To determine whether a change in an account is a positive (+) or negative (-) adjustment to cash:
    --add back non-cash expenses
    --when assets go down, assume the business got cash for them (+)
    --when assets go up, assume the business paid to buy them (-)
    --when liabilities or equity go down, assume they were paid with cash (-)
    --when liabilities or equity go up, assume the business received cash (+)
  22. analysis
    a detailed investigation or examination of something
    A company uses ratio analysis in order to analyze results from various numbers on the financial statements.
    --beginning of year inventory + end of year inventory/2 = average inventory
    --income from operations/interest expense = times-interest-earned
    --net income/net sales = rate of return on net sales
    --market price per common share/earnings per share = price-earnings ratio (P/E)
  23. ratio
    the relative magnitudes of two quantities
    --net income + interest expense/average total assets = rate of return on total assets
    --net income - preferred dividends/average common stock equity = rate of return on common stockholders' equity
    --dividend per share/market price per share = dividend yield
    --total equity - preferred stock equity/number of common stock shares outstanding = book value per common stock share
  24. formula
    a statement expressing some fundamental principle
    --direct labor + direct materials + overhead = manufacturing cost of goods sold
    --operating revenue - operating expenses = operating net income
  25. clue
    evidence that helps to solve a problem
    --Remember the three methods to calculate cost of goods sold: perpetual, periodic, and manufacturing.
    --Expect questions that will explain a liability and ask you to break it down into current and long-term portions for the balance sheet.
Created on November 2, 2016 (updated December 15, 2016)

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