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Last in, First out (LIFO) - ACCOUNTING method of valuing inventory under which the costs of the last goods acquired are the first costs charged to expense. Commonly known as LIFO.
Lease - Conveyance of land, buildings, equipment or other ASSETS from one person (LESSOR) to another (LESSEE) for a specific period of time for monetary or other consideration, usually in the form of rent.
Leasehold - Property INTEREST a LESSEE owns in the leased property.
Ledger - Any book of accounts containing the summaries of debit and credit entries.
Lessee - Person or entity that has the right to use property under the terms of a LEASE.
Lessor - Owner of property, the temporary use of which is transferred to another (LESSEE) under the terms of a LEASE.
Letter of Credit - Conditional bank commitment issued on behalf of a customer to pay a third party in accordance with certain terms and conditions. The two primary types are commercial letters of credit and standby letters of credit.
Leveraged Buy Out - Acquisition of a controlling INTEREST in a company in a transaction financed by the issuance of DEBT instruments by the acquired entity.
Leveraged Lease - Transaction under which the LESSOR borrows funds to acquire property which is leased to a third party. The property and lease rentals are security for the LESSOR"S indebtedness.
Liability - DEBTS or obligations owed by one entity (DEBTOR) to another entity (CREDITOR) payable in money, goods, or services.
Lifetime Learning Credit - This allows a credit for 20 percent of qualified tuition and fees paid by the taxpayer with respect to one or more students for any year that the HOPE SHCOLARSHIP CREDIT is not claimed.
LIFO - See LAST IN, FIRST OUT.
Limited Liability Company (LLC) - Form of doing business combining limited liability for all owners (called members) with taxation as a PARTNERSHIP. An LLC is formed by filing ARTICLES OF ORGANIZATION with an appropriate state official. Rules governing LLCs vary significantly from state to state.
Limited Liability Partnership (LLP) - GENERAL PARTNERSHIP which, via registration with an appropriate state authority, is able to enshroud all its partners in limited liability. Rules governing LLPs vary significantly from state to state.
Limited Partnership - PARTNERSHIP in which one or more partners, but not all, have limited liability to creditors of the partnership.
Liquid Assets - Cash, cash equivalents, and marketable SECURITIES.
Liquidation - Winding up an activity by distributing its ASSETS to the appropriate parties and settling its DEBTS.
Listed Property - Limits are imposed on the DEPRECIATION deduction a taxpayer may claim on certain listed property as follows:
1. A passenger car;
2. Other property used as transportation;
3. Property used for purposes of entertainment, recreation, or amusement;
4. A computer and peripheral equipment; and
5. Cellular telephone.
Litigation Support/Dispute Resolution - A service that CPAs often provide to attorneys - e.g., expert testimony about the value of a business or other asset, forensic accounting (a partner stealing from his other partners, or a spouse understating his income in a matrimonial action). The lawyer hires the CPA to do the investigation and determine the amount of money stolen or understated.
LLC - See LIMITED LIABILITY COMPANY.
LLP - See LIMITED LIABILITY PARTNERSHIP.
Long-Term Debt - DEBT with a maturity of more than one year from the current date.
Loss - Excess of EXPENDITURES over REVENUE for a period or activity. Also, for tax purposes, an excess of basis over the amount realized in a transaction. (See NET INCOME.)
Lower of Cost or Market - Valuing ASSETS for financial reporting purposes. Ordinarily, "cost" is the purchase price of the asset and "market" refers to its current replacement cost. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) requires that certain assets (e.g., INVENTORIES) be carried at the lower of cost or market.
Management Accounting - Reporting designed to assist management in decision-making, planning, and control. Also known as Managerial Accounting.
Management Discussion and Analysis (MD&A) - SEC requirement in financial reporting for an explanation by management of significant changes in operations, ASSETS, and LIQUIDITY.
Management"s Report - Management is required to include in its annual report its assessment of the effectiveness of the company"s internal control over financial reporting in addition to its audited financial statements as of the end of the most recent fiscal year.
Managerial Accounting - See MANAGEMENT ACCOUNTING.
Margin - Excess of selling price over the unit cost.
Mark-to-Market - Method of valuing ASSETS that results in adjustment of an asset"s carrying amount to its market value.
Marketable Securities - Stocks and other negotiable instruments which can be easily bought and sold on either listed exchanges or over-the-counter markets.
Married Taxpayers - Taxpayers that are married may file a JOINT RETURN, therefore combining their INCOME and expenses. Individuals will be considered married if:
1. They are living as husband and wife;
2. They are recognized living as common law marriage; or
3. Legally married but separated and living apart but not legally divorced.
Marriage is determined as of the last day of the tax year.
Matching Principle - A fundamental concept of basic accounting. In any one given accounting period, you should try to match the revenue you are reporting with the expenses it took to generate that revenue in the same time period, or over the periods in which you will be receiving benefits from that expenditure. A simple example is depreciation expense. If you buy a building that will last for many years, you don"t write off the cost of that building all at once. Instead, you take depreciation deductions over the building"s estimated useful life. Thus, you"ve "matched" the expense, or cost, of the building with the benefits it produces, over the course of the years it will be in service.
Material Weakness - A significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
Materiality - Magnitude of an omission or misstatements of ACCOUNTING information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would change or be influenced.
MD&A - See MANAGEMENT DISCUSSION AND ANALYSIS.
Merger - BUSINESS COMBINATION that occurs when one entity directly acquires the ASSETS and LIABILITIES of one or more entities and no new corporation or entity is created. (See CONSOLIDATION.)
Monetary Items - Definite fixed amounts stated in terms of dollars, either by law or by contract agreement.
Mortgage - Legal instrument evidencing a security interest in ASSETS, usually real estate.Mortgages serve as COLLATERAL for PROMISSORY NOTES.
Municipal Bond - BOND issued by a government or public body, the INTEREST on which is typically exempt from federal taxation.
Matching Principle - A fundamental rule f baxic accounting. In any one given accounting period, you should try to match the revenue you are reporting with the expenses it took.
Mutual Fund - Investment company which generally offers its shares to the general public and invests the proceeds in a diversified portfolio of SECURITIES. (See CLOSED-END MUTUAL FUND and OPEN-END MUTUAL FUND.)
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Improvement - EXPENDITURE directed to a particular ASSET to improve its performance or useful life.
Imputed Interest - If no interest or an unrealistic amount of interest is charged in a salve involving certain kinds of deferred payments, then the transaction will be treated as if the realistic rate of interest had been used. The difference between the realistic interest and the interest actually used is referred to as imputed interest.
Income - Inflow of REVENUE during a period of time. (See NET INCOME.)
Income Statement - Summary of the effect of REVENUES and expenses over a period of time.
Income Tax Basis - (1) For tax purposes, the concept of basis determines the proper amount of gain to report when an ASSET is sold. Basis is generally the cost paid for an asset plus the amounts paid to improve the asset less deductions taken against the asset, such as DEPRECIATION and AMORTIZATION. (2) For accounting purposes, a consistent basis of accounting that uses income tax accounting rules while GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) does not. (See OTHER COMPREHENSIVE BASIS OF ACCOUNTING.)
Individual Retirement Account (IRA) - An IRA is a personal savings plan that allows an individual to make cash contributions per year dependent on the individual"s adjusted gross income and participation in an employer"s retirement plan. Under a traditional IRA these earnings are not taxable until the time of withdrawal from the plan.
Inheritance - As distinguished from a BEQUEST or devise, an inheritance is property acquired through laws of descent and distribution from a person who dies without leaving a will. The value of property inherited id excluded from a taxpayers gross income, but if the property inherited produces income it is included in gross income. A taxpayer"s basis in inherited property is the fair market value at the time of death.
Initial Public Offering (IPO) - When a private company goes public for the first time.
Inquiry - A procedure that consists of seeking information, both financial and non financial, of knowledgeable persons throughout the company. It is used extensively throughout the audit and often is complementary to performing other procedures. Inquiries may range from formal written inquiries to informal oral inquiries.
Insolvent - When an entity"s LIABILITIES exceed its ASSETS.
Installment - Partial payment.
Installment Method - Tax ACCOUNTING method of reporting GAIN on the sale of an ASSET exchanged for a RECEIVABLE. In general, the gain is reported as the note is paid off.
Intangible Asset - Asset having no physical existence such as trademarks and patents. (See TANGIBLE ASSET.)
Interest - Payment for the use or forbearance of money.
Interim Financial Statements - FINANCIAL STATEMENTS that report the operations of an entity for less than one year.
Internal Audit - AUDIT performed within an entity by its staff rather than an independent certified public accountant.
Internal Control - Process designed to provide reasonable assurance regarding achievement of various management ives such as the reliability of financial reports.
Internal Control Over Financial Reporting - A process designed by, or under the supervision of the company"s principal executive and principal financial officers or persons performing similar functions and effected by the company"s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
1. Pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of the assets of the company.
2. Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the company.
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company"s assets that could have a material effect on the financial statements.
Internal Rate of Return - Method that determines the discount rate at which the present value of the future CASH FLOWS will exactly equal investment outlay.
Internal Revenue Code - Collection of tax rules of the federal government. Also referred to as Title 26 of the United States Code.
Internal Revenue Service (IRS) - Federal agency that administers the INTERNAL REVENUE CODE. The IRS is part of the United States Treasury Department.
International Accounting Standards Committee, the (IASC) - is an independent private sector body, formed in 1973, with the ive of harmonizing the accounting principles which are used in businesses and other organizations for financial reporting around the world. Its members are 143 professional accounting bodies in 104 countries.
Internet/World Wide Net - The Internet is the unregulate wild west show of computer networks connected together throughout the world. The World Wide Web or WWW, is part of the Internet.
Inventory - Tangible property held for sale, or materials used in a production process to make a product.
Investment - EXPENDITURE used to purchase goods or services that could produce a return to the investor.
Investment Tax Credit - This is a component of the general business credit and consists of the following:
1. The energy credit;
2. The rehabilitation credit; and
3. The reforestation credit.
Involuntary Conversions - This is a conversion of property where it is in whole or part destroyed, stolen, seized, requisitioned or condemned (or where there is a threat or imminence of requisition or condemnation).
IPO - See INITIAL PUBLIC OFFERING.
IRS - See INTERNAL REVENUE SERVICE.
Issuer - This term means an issuer, the securities of which are registered under Section 12 of the Securities Exchange Act of 1934, or that is required to file reports under Section 15(d) of that Act, or that files or has filed a registration statement with the SEC that has not yet become effective under the Securities Act of 1933 and that it has not withdrawn.
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Jeopardy - If the IRS believes that collection of tax appears to be in jeopardy (danger of being uncollected), it may immediately assess and collect such tax. The intermediate steps are bypassed.
Joint Return - A return filed by married taxpayers or surviving spouses.
Joint Venture - When two or more persons or organizations gather CAPITAL to provide a product or service. Often carried out as a PARTNERSHIP.
Journal - Any book containing original entries of daily financial transactions.
Junk Bonds - DEBT SECURITIES issued by companies with higher than normal credit risk. Considered "non-investment grade" bonds, these SECURITIES ordinarily yield a higher rate of interest to compensate for the additional risk.
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Keogh Plan - Also known as an HR 10, this is a qualified retirement plan for self employed who do not incorporate their business. If qualifications are met the taxpayer may receive a deduction for contributions made.
Key Employee - For purposes of rules that apply to top heavy plans, a key employee:
1. An officer of the employer earning more than $130,000;
2. An individual who owns more than 5 percent of the employer;
3. An individual who owns more than 1 percent of the employer and compensation greater than $150,000.
Key Person Insurance - Business-owned life insurance contract typically on the lives of principal officers that normally provides for guaranteed death benefits to the company and the accumulation of a cash surrender value.
Kiting - Writing checks against a bank account with insufficient funds to cover them, hoping that the bank will receive deposits before the checks arrive for clearance.
