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
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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
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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
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Consolidated financial statements are the combined financial statements of a company which has one or more subsidiaries. Under U.S. GAAP, a company which has control over the subsidiary must fully combine the subsidiary’s financial statements with the parent company’s financial statements. Control is usually achieved when the parent company owns at least 50% of the
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A bond is a debt instrument which represents a loan to the issuer. Bonds generally pay periodic interest payments to the bond holder. Bonds are generally issued for a finite period. The end of the bond’s term is known as the maturity date. At the maturity date the issuer must pay the bond holder the
