What is Stock Based Compensation? Stock Based Compensation (also called Share-Based Compensation or Equity Compensation) is a way of paying employees, executives, and directors of a company with equity in the business. It is typically used to motivate employees beyond their regular cash-based compensation (salary and bonus) and to align their interests with those of…
What is Accrued Income? Accrued income is income that a company will recognize and record in its journal entries when it has been earned – but before cash payment has been received. There are times when a company will record a sales revenue even though they have not received cash from the customer for the…
What is the Legal Liability of Financial Auditors? Concerns about the legal liability of auditors continue to grow every day. Financial auditors are highly important people because, ultimately, they are responsible for enhancing the reliability of financial statements for external users. Like other professionals, they can face civil and criminal liabilities in the performance of…
What is the Sales and Collection Cycle? The Sales and Collection Cycle, also known as the Revenue, Receivables, and Receipts (RRR) Cycle, is composed of various classes of transactions. The sales class and receipts class of transactions are the typical journal entries that debit accounts receivable and credit sales revenue, and debit cash and credit accounts…
What is the Acquisition and Payment Cycle? The Acquisition and Payment Cycle (also referred to as the PPP Cycle for Purchases, Payables, and Payments) consists mainly of two classes of transactions. The first class is the acquisition class. The typical journal entry for this class of transactions is a debit to inventory or an expense…
What are Current Assets? Current assets are all assets that a company expects to convert to cash within one year. They are commonly used to measure the liquidity of a company. A company’s assets on its balance sheet are split into two categories – current and non-current (long-term or capital assets). Current (Short-term) vs. Non-Current…
What are Internal Controls? Internal controls are policies and procedures put in place by management to ensure that, among other things, the company’s financial statements are reliable. Some internal controls relevant to an audit include bank reconciliations, password control systems for accounting software, and inventory observations. The objective of the auditor is to identify and…
What is an Operating Lease? An operating lease is an agreement to use and operate an asset without the transfer of ownership. Common assets that are leased include real estate, automobiles, aircraft, or heavy equipment. By renting and not owning, operating leases enable companies to keep from recording an asset on their balance sheets by…
What is an Operating Cycle? An Operating Cycle (OC) refers to the days required for a business to receive inventory, sell the inventory, and collect cash from the sale of the inventory. This cycle plays a major role in determining the efficiency of a business. Formula The OC formula is as follows: Operating Cycle = …
What is Days Payable Outstanding? Days Payable Outstanding (DPO) refers to the average number of days it takes a company to pay back its accounts payable. Therefore, days payable outstanding measures how well a company is managing its accounts payable. A DPO of 20 means that, on average, it takes a company 20 days to…
