Investing Glossary

Straight-line depreciation is a method for calculating yearly depreciation expense for a long-lived fixed asset where an equal amount of depreciation is recognized each year of the asset’s useful life.  To calculate straight-line depreciation, we need three pieces of information. First, we need to know the asset’s cost. Second, we need an estimate of the […]

The specific identification method is a method of accounting for inventory and cost of sales where the exact item is matched to the sale.  The specific identification method can be used when companies sell high priced items that can be easily identified and tracked. For example, the specific identification method would be appropriate for firms

Solvency refers to a company’s ability to satisfy its financial liabilities with existing resources.  A company is considered solvent when its assets and cash flows are sufficient to service its liabilities. A company is considered insolvent when its assets and cash flows are insufficient to service its liabilities.   Solvency is not the same as liquidity.

The Securities and Exchange Commission (SEC) is a federal agency with regulatory jurisdiction over the issuance and trading of financial securities.  After the 1929 stock market crash, Congress established a committee to investigate the causes of the crash. This committee, which later became associated with its lead counsel, Ferdinand Pecora, uncovered a number of abuses

Retained earnings represent the cumulative net profits a company has retained in the business.   For any given period, retained earnings equal the period’s net income minus any dividends paid to shareholders in the period. Cumulatively, retained earnings equal the beginning balance of retained earnings plus the period’s net income minus any dividends paid over the

The Sarbanes-Oxley Act is legislation passed in July of 2002 which addressed flaws in the governance of U.S. publicly traded corporations.  The legislation is named after the bill’s key sponsors, former Democratic Senator Paul Sarbanes and former Republican Congressman Michael Oxley.  The legislation was passed in response to a wave of corporate scandals that occurred

Other comprehensive income refers to income, expenses, gains, or losses which under U.S. GAAP are excluded from the income statement. Rather, these transactions are accounted for directly into shareholder’s equity.  The purpose of the other comprehensive income account is to separate certain transactions which may cause unnecessary volatility in a company’s earnings and distort the

Permanent accounts are accounts whose balances carry over from one accounting period to another.  Permanent accounts are shown on the balance sheet. In other words, permanent accounts are asset, liability, and equity accounts. Permanent accounts convey information about a company’s financial position.   Temporary accounts are accounts whose balances begin an accounting period at zero.   Temporary

Revenue recognition refers to the accounting rules that govern the amount of revenue which a company can recognize in a given period.  Under U.S. GAAP, the general principal for recognizing revenue is to record revenues when they are earned – i.e., when the services have been performed or the goods have been provided to customers. 

Petty cash refers to a currency fund companies use for small purchases.   The petty cash fund is a convenient way for companies to account for incidental expenditures.  Because the petty cash fund can be highly susceptible to theft, companies generally designate an employee to oversee the fund. The employee responsible for the petty cash fund