Goodwill is an intangible asset which arises from an acquisition and represents the positive difference between the purchase price and the fair market value of the acquiree’s identifiable assets.   Under U.S. GAAP, goodwill accounting can differ depending on whether the company is privately held or publicly owned – i.e., has its shares listed on a […]

The last-in, first-out (LIFO) method is an inventory valuation method which assumes that the most recent inventory purchases are sold first.   The LIFO method is one of three inventory valuation methods. The other two methods are the first-in, first-out (FIFO) method and the average cost method.  The LIFO and FIFO methods are inventory flow assumptions.

A fixed asset is a tangible economic resource which is expected to provide economic benefits to the firm beyond the greater of one year or an accounting cycle.  Fixed assets are intended for use in the production of goods or services. In other words, fixed assets are not intended for resale but are rather used

A deferral is a delay in the recognition of a revenue or expense transaction.   Deferred revenue is revenue which is not yet earned. Deferred revenue creates a performance obligation to the company – i.e., the company is obligated to provide the goods or services for which the payment was made. As such, deferred revenue is

Carrying value refers to the balance sheet value of an asset.   For tangible assets, the carrying value is the asset’s acquisition price less accumulated depreciation and any impairments. For intangible assets, the carrying value is the asset’s acquisition price less amortization and any impairments.   An asset’s carrying value can differ substantially from the asset’s market

The first-in, first-out (FIFO) inventory method is a method for valuing inventory which assumes that the oldest purchases are the first units sold.  The FIFO method is one of three inventory valuation methods, the other two being the last-in, first-out method (LIFO) and the weighted-average inventory method.   The FIFO and LIFO methods are referred to

The Federal Insurance Contributions Act (FICA) tax is a payroll tax which is withheld from employee wages and matched by the employer.  The FICA tax is composed of a Social Security tax and a Medicare tax. The Social Security Administration caps the amount of gross income subject to the Social Security tax. However, there is

The cost principle is an accounting principle which states that an asset, liability, or equity should be recorded on a company’s book at the original acquisition cost.  The cost principle is an example of the concept of conservatism inherent in financial accounting. Thus, assets may be written-down, but reporting standards (in the U.S.) does not

The direct write-off method refers to the expensing of a receivable when the firm deems the receivable uncollectible.   The direct method involves two steps. First, the company has sufficient reason to believe that a past-due receivable will not be collected. Second, the company must make an accounting entry for the bad debt expense.  An important

A business combination occurs when two or more business entities combine into a single reporting entity.   Under U.S. GAAP, a combination occurs between an acquirer and an acquiree(s). The acquirer is the firm acquiring while the acquiree is the firm being acquired. These two designations can be misleading, as they are distinct from the size