What are Financial Statements? Financial statements are the records of a company’s financial condition and activities during a period of time. Financial statements show the financial performance and strength of a company. The three core financial statements are the income statement, balance sheet, and cash flow statement. The three statements are linked together to create…
What is Depletion? Depletion is the reduction in the quantity of a factor of production as a result of the production process. Companies use existing goods and services to create new goods and services. The conversion of existing goods into new goods is known as a production process. Depletion in Accounting The tax codes of…
What is Book Value? Book value is a company’s net worth as recorded on its balance sheet, calculated by subtracting total liabilities from total assets. Book value represents the accounting value of a business based on historical costs and appears on a company’s balance sheet as total shareholder equity. Investors compare book value to market…
What is a Temporary Account? A temporary account is an account that is closed at the end of every accounting period and starts a new period with a zero balance. The accounts are closed to prevent their balances from being mixed with the balances of the next accounting period. The objective is to show the…
What is Incremental Cash Flow? Incremental cash flow refers to cash flow that is acquired by a company when it takes on a new project. To estimate an incremental cash flow, businesses must compare projected cash flow if it takes on a new project to when it doesn’t, putting into consideration how accepting such project…
What is Accumulated Other Comprehensive Income (AOCI)? Accumulated Other Comprehensive Income (AOCI) are special gains and losses that are listed as special items in the shareholder equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income…
What is the Carrying Amount? The carrying amount is the original cost of an asset as reflected in a company’s books or balance sheet, minus the accumulated depreciation of the asset. It is also called book value and is not necessarily the same as an asset’s fair value or market value. Carrying Amount vs. Market…
What is LIFO Liquidation? LIFO liquidation refers to the practice of discount selling older merchandise in stock or materials in a company’s inventory. It is done by companies that are using the LIFO (last in, first out) inventory valuation method. The liquidation occurs when a company using LIFO wants to get rid of old and…
What is a LIFO Reserve? A LIFO reserve acts as a contra account, meaning it’s a ledger account used for inventory purposes that shows the differences between the two primary ways inventory is valued: LIFO (last in, first out) and FIFO (first in, first out). A contra account shows the opposite balance of other ledger…
What is the Periodic Inventory System? The periodic inventory system refers to conducting a physical inventory count of goods/products on a scheduled basis. Maintaining physical inventories can be costly because the process eats up time and manpower. Thus, many companies only conduct physical inventory counts periodically. A periodic inventory system is a commonly used alternative…
