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  • Definitions

    Terms and Definitions and FAQs

    Explore this resources page to find definitions of commonly used terms in the field along with answers to FAQs.

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  • Accounting Definitions

     

    403B Plan: “A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.  Individual accounts in a 403(b) plan can be any of the following types. An annuity contract, which is a contract provided through an insurance company, a custodial account, which is an account invested in mutual funds, or a retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.  We use the term “403(b) account” to refer to any one of these funding arrangements throughout this publication, unless otherwise specified.” (IRS.gov)

    Accounting: Practice and body of knowledge concerned primarily with:

    • Methods of recording transactions
    • Keeping financial records
    • Performing internal audits
    • Reporting and analyzing financial information to the management
    • Advising on taxation matters

    Accredited investor: The requirement of SEC registration of publicly traded securities was instituted to protect the average investor. Registration, while not guaranteeing the quality of the investment, ensures that sufficient information has been made public for the investor to make an informed investment decision. To invest in private equity funds, hedge funds, and other non-registered investments, the investor must be considered accredited. To qualify as an accredited investor an individual must have net worth exceeding $1 million or income exceeding $200,000 in each of the two most recent years and a reasonable expectation of the same income level in the current year.  

    Activity Driver: A variable used in assignment costs to cost objects.

    Cost Driver: A factor that drives cost and it is used in assigning activity cost pools to products and services. 

    Activity-based costing: Accumulates overhead costs for each organizational activity and then assigns the costs of the activities to the products, services, or customers causing that activity.

    Activity-based management: Supports business excellence by providing information to facilitate long-term strategic decisions about such things as product mix and sourcing.

    Asset: Something valuable that an entity owns, benefits from, or has use of, in generating income.

    Budgets: Establishing specific goals, executing plans to achieve the goals, and periodically comparing actual results with the goals.

    Cost accounting: A branch of management accounting concerned with accumulating manufacturing costs for financial reporting and decision-making purposes.

    Crowd funding: Many individuals (i.e., a crowd) pooling their money to fund the endeavors of an individual, organization, or firm. 

    Entrepreneur: An individual who comes up with the idea for a business enterprise and is willing to accept all the associated financial and personal risks. 

    Equity capital: An investment representing an ownership claim on a project or firm. Holders of equity capital share in the gains and losses of the endeavor. Contrast with debt capital that represents loaning money to the firm or endeavor. Holders of debt (i.e., loan documents) expect to receive interest payments and the ultimate return of the amount loaned (i.e., the principal).

    Employee Benefits Programs: In general, indirect and non-cash compensation paid to an employee. Some benefits are mandated by law (such as social security, unemployment compensation, and workers compensation), others vary from firm to firm or industry to industry (such as health insurance, life insurance, medical plan, paid vacation, pension, gratuity).”

    Enron: A company that infamously created and presented fraudulent financial statements.

    Fraud: Act of deception, intentional concealment

    Gift: Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

    Independent accountant: Generally, an independent accountant is an outside accountant; an accountant not on the client’s payroll. In the same way, an independent auditor is free from any influence from the client and thus can produce totally objective auditing reports. 

    Intellectual resources: The expertise, experience, skills, etc. that a contributor brings to the crowd funding endeavor.

    Manipulation: Influence over a person or action for one’s own personal gain 

    Mezzanine Financing: A capital structure in the form of subordinated debt and/or preferred equity instruments.

    Not-for-Profit (NFP): This type of accounting involves non-profit companies like universities, medical institutions, and federal/non-federal government contractors. These entitles must adhere to the NFP cost accounting standards.

    Offering: In terms of publicly traded securities, the word offering can take two meanings. First, a firm can plan to have a security offering. This is when the securities are sold (offered) to the public. Next, the securities themselves are sometimes considered the offering. If a firm sold $100 million worth of bonds in January 2014, for example, those bonds are distinguished from other bonds issued by the same firm by calling them the January 2014 offering.The income generated from sale of goods or services, or any other use of capital or assetsassociated with the main operations of an organization before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and lossstatement from which all charges, costs, and expenses are subtracted to arrive at net income. Also calledsales, or (in the UK) turnover

    Overstatement of Revenue: A company claims to have taken in more money than it did to show that the company is worth more

    Payment Terms: The conditions under which a seller will complete a sale. Typically, these terms specify the period allowed to a buyer to pay off the amount due, and may demandcash in advance, cash on delivery, a deferred payment period of 30 days or more, or other similar provisions.

    PIK Interest: Payment in kind interest is when interest is not paid in cash, but rather, is added to the principal balance of the note and subsequent interest accrues on the compounded amount.

    Principle Executive Officer: The person most considered in charge of operations. In the case of crowd funding, this would most likely be the entrepreneur or the president of the company seeking funding.

    SEC: Securities and Exchange Commission – Reviewer of all publicly traded companies’ financial statements 

    SOX: Sarbanes-Oxley Act passed July 2002 to ensure financial statements are fraud free

    Subordinated Debt: A debt that represents a claim on assets that ranks after all senior debts in the event of liquidation or bankruptcy.

    Sundance Film Festival: The Festival was started in 1981 by Robert Redford in Sundance, Utah, and provides a stage for independent artists to explore the viability of their films without commercial and political pressures. The festival itself is now held in Park City, Utah. The Sundance Institute, which runs the festival, is actually a form of crowd funding, in that the Institute accepts donations via the Internet and other means to help aspiring film writers and producers. See www.sundance.org for more information and to purchase tickets to the next festival!

    Traditional Accounting System: The allocation of manufacturing overhead costs to the products manufactured. The system allocates the factory’s indirect costs to the item manufactured on the basis of volume.

    Uncertain sales: Sales that have not yet gone through as sales

    U.S. Securities and Exchange Commission (SEC): Following the Great Depression, the Securities Exchange Act of 1934 created the U.S. Securities and Exchange Commission. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” See www.sec.gov for a complete discussion of the development of the SEC and its mission.  

      Frequently Asked Questions

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      FAQ

      How can I find out the benefits offered to me where I work?

      Consult with the human resources department of the company you are employed by and navigate the employee handbook.  There is more information then you may know about buried in these long documents.  Read them carefully and in their entirety.    

      What is the difference between a 401K plan and an IRA?

      A 401K is only able to be enrolled in if you are an employee of a company offering this option.  Your maximum contribution tax-free is $18,000 for 2016.  An IRA is a retirement savings option that anyone can take whether they are employed by a company or not.  One can invest in both a 401K and an IRA if a 401K is available. 

      How can I best estimate my medical costs to assist in making my health insurance plan choice?

      The fine print of each of the health plans offered will provide detail on what the costs would be to you as the covered member.  Copay information along with deductible and co-insurance amount will be highlighted.  The health insurance company’s websites also have estimators on actual medical procedures and the average cost of them to assist you for planning purposes as well.  

      What are the benefits of having an accurate cash flow statement?

      Cash flow is relatively easy to calculate by comparing cash at the start of the year and the end of the year. Taking extra steps to complete a full cash flow statement tells you a lot about where you are consuming or producing cash.  

      What's more important, income statements or balance sheets?

      It depends on what your overall objective is with the information. The income statement is the more important document because it tells you if you are making money.

      How can a balance sheet help you?

      A balance sheet shows you how your assets are being used. For example, from a balance sheet you can tell whether or not your inventories are too large, whether your receivables are growing, or whether your ratio of debt to equity is getting too high.

      Why must I understand the accounting cycle and complete the work by hand and not just use computer software to do it for me?

      There are so many reasons that we must learn the foundation of accounting and the entire accounting cycle by "hand" but the biggest reason is to understand how to unwind any statements software may prepare and explain the "how" to arriving at all of the numbers. There are certainly times that the numbers prepared by accounting software may be incorrect and without the foundation knowledge on how to arrive at all of the components of the financial statements we would never be able to find the error.  

      How many reports do management accountants produce for managers? 

      Management accountants prepare a variety of reports. Some reports focus on how well managers or business units have performed, other reports provide timely and frequent updates on key indicators such as order received, order backlog, capacity utilization, and sales. 

      Are there opportunities for accountants in management accounting? 

      The field of accounting that has increased the most in the last 20 years is management accounting or managerial accounting.

      Is activity-based costing (ABC) easy to learn and to apply?

      ABC is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and fixed as well as variable costs.

      What is the most popular management accounting software that companies use?

      QuickBooks is considered one of the most popular and most user friendly. This software is an accounting and bookkeeping application, but it is not a financial analysis package. 

      Is there any certification for management accountants?

      There is the Certified Management Accountant certification after passing two exams from the Institute of Management Accountants. Learn more at www.imanet.org.

      Cloud Computing FAQ

      While everyone in the IT industry is talking about cloud computing, there is still confusion about the cloud platform and how it should be used. These FAQs will answer some of the key questions enterprises are asking about cloud computing.  

      What is cloud computing?

      Cloud computing is a style of computing in which massively scalable IT-related capabilities are provided "as a service" using Internet technologies to multiple external customers. Clouds combine many servers into large computing pools and divide single servers into multiple virtual machines that can be spun up and powered down at will.  

      What is a private cloud?

      A private cloud would be highly virtualized stringing together mass quantities of IT infrastructure into one or a few easily managed logical resource pools. Software developers build and deploy Web applications on this hosted infrastructure.  

      How do vendors charge for these services?

      A small Linux server currently costs 10 cents an hour, while the largest Windows server costs  $1.20 an hour. Storage clouds are priced similarly. Nirvanix's cloud storage platform has prices starting at 25 cents per gigabyte of storage each month, with additional charges for each upload and download (Brodlyn, 2009)

      Who are the leaders in this new industry?

      Google Apps continues to create online office productivity tools. In addition to the e-mail, calendaring, word processing and a simple Web site creation tools,  Google is advancing  a set of email and Web security services and a Google App Engine= which serves as a platformservice offering that lets developers build applications and host them on Google's infrastructure. 

      Amazon remains  one of the true innovators in Web-based computing. Amazon, offers pay-as-you-go access to virtual servers and data storage space. The launching of the  Elastic Compute Cloud in 2006, allowed Amazon to be the vanguard in  "cloud computing." 

      While Amazon and Google may be the biggest names in cloud computing today, AT&T benefits from an existing  comes to infrastructure to build upon. Building publicly accessible cloud infrastructure is not inexpensive or uncomplicated.  Verizon has recognized these cloud opportunities  and seems poised to make a larger run at the cloud market in 2014.

      Reference

      Brodlyn, J. (2009). FAQ: Cloud computing, Network World (May 18, 2009). Retrieved from http://www.networkworld.com/supp/2009/ndc3/051809-cloud-faq.html

      Home Office Deduction FAQs

      Who can take the home office deduction?

       Whether you rent or own your home you may indeed be entitled to deduct various expenses associated with the business use of your abode. The IRS deductions can be used for all kind of dwellings. An individual who uses some area of their principle residence for business either as self-employed or as an employee may if certain criteria are met take a home office deduction on their individual tax return. While this is true many individual don't even attempt to take this deduction.

      Fear of IRS Audit 

      Many individual opt not to take this deduction because they are afraid of being audited. Kiplinger financial magazine and newsletter identifies "claiming the home office deduction" as one of its 14 highlighted sure red flags for an IRS audit.  Why? Well according to the article, "The IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government." (http://www.kiplinger.com/slideshow/taxes/T056-S001-irs-audit-red-flags-the-dirty-dozen-slide-show/index.html#YM6eHeVOIzXA24mC.99)

      In addition to the fear of being audited, as with most of the tax code individuals considered this portion particularly too complicated and confusing. Beginning with forms filed for tax year 2013 the IRS has allowed a new simplified method for taking the deduction for business use of their home.

      Note: "This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction." http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

      Criteria for Deduction 

      To take these deductions you must meet several criteria established by the IRS. Your home office must:

      1. Use part of your primary residence
      2. Be required by your employer
      3. Be used exclusively for business purposes

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