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Accrual accounting: An accounting method that recognizes revenues as they are earned and expenses
as they are incurred. The timing of revenue and expense recognition is not tied to the timing of the
inflow and outflow of cash. Accrual accounting is seen as essential in order to develop reliable
measures of periodic financial performance and is a core concept of generally accepted accounting
principles (GAAP).
Acid test ratio: See Quick ratio.
Acquisition: The purchase—not necessarily for cash—of a controlling interest in a firm.
AICPA (The American Institute of Certified Public Accountants): This is the national professional
association of certified public accountants (CPAs).
Amortization: The periodic, noncash charge used to reduce an intangible asset.
Amortization schedule: The portion of the total initial cost of an intangible asset expensed each
period.
Amortize: To repay principal and interest toward an amount borrowed over time.
Annuity: Equal payments, at a specific time interval, for a specific time period.
Annuity due: An annuity that pays installments at the beginning of each time interval.
Arbitration: A form of alternative dispute resolution. Its purpose is to resolve disputes outside of the
court system using a negotiator or arbitrator. There are various organizations that provide such service
(e.g., JAMS and the American Arbitration Association). There are other professionals, usually
attorneys or retired judges, who perform these services.
Asset: An item owned by an enterprise and expected to provide future benefits to that enterprise.
Examples of assets include cash, accounts receivable, inventories, property, plant and equipment, and
intellectual property (such as patents, trademarks, and copyrights).
Asset acquisition: An acquisition executed by purchasing the assets of the target firm.
Asset approach: A general way of determining a value indication of a business, business ownership
interest, or security by using one or more methods based on the value of the assets of that business net
of liabilities.
Asymmetric information: A situation where an individual or group is better informed than another
individual or group. If the managers of a company have better information about the company than
outsiders, the managers have asymmetric information.
Audit committee: A committee of the board of directors required by Sarbanes-Oxley (SOX) for all
U.S. public companies. The audit committee must include only outside directors (which excludes
officers or employees of the corporation), and at least one audit committee member is required to have