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cafeteria plan
A tax term that refers to an employee benefit plan maintained by an employer. A cafeteria plan allows employees to take taxable cash or to select among certain nontaxable benefits such as dependent care, group-term life insurance, and health insurance. It is known by other names including flexible spending plan, or simply as a flex plan.


callable bond
A bond which allows the issuing company or governing body to pay the bond before maturity.


capital asset
An asset intended for long-term use or possession, as opposed to assets, such as inventory, that are intended for current sale.


capital expenditure
An expenditure which benefits a future accounting period by adding assets to the company or extending the life or capacity of existing assets.


capital gain (loss)
The profit or loss made when selling a noninventory asset. In tax law you can have either a long-term capital gain (loss) or a short-term capital gain (loss) depending on how long you have owned the asset. Some taxpayers think that capital gains taxes are harsher than regular taxes. In fact, it is the preferred rate, if one must be taxed on a transaction, since it is lower than your normal tax bracket.


capital stock
The account maintained on the company books to show the issued value of the stock of a corporation. The corporation may have different classes of stock with differing rights (such as voting and nonvoting). Each class of stock is shown in a separate account.


carryback (carryover)
In tax law, this is the loss or unused tax credit for a tax year that may be carried back to prior years to offset previously taxed earnings to create a refund of taxes previously paid. Any carryback amount not used in prior years is available as a carryover to future years.


cash method
A method of accounting in contrast to the accrual method. Under the cash method, income is recorded only when the cash is actually received, without regard to when it was earned. Likewise, expenses are recorded only when actually paid, without regard to when they were actually incurred.


cash flow
The process of money coming in from various sources (for example, from income or loans), and being spent for various purposes.


cash flow statement
A useful management report showing the source of cash received and disbursed for a given accounting period, such as the past month, quarter, or year.
See also financial statement.


cash surrender value
The amount of money an insurance policy holder would receive if the policy were surrendered at a given date. You can generally borrow from your cash surrender value through policy loans.


cashier's check
A check drawn on a bank by itself. A cashier's check is often requested in transactions where the receiving party wants to be assured that the check will actually clear the bank. The bank makes the check payable from the bank directly to the party that you want to pay.


casualty loss
The tax law allows a tax deduction for the loss of property due to fire, storm, shipwreck, or other casualty. Items that are stolen also fall into this category. There are limitations on the amount you can deduct.


certificate of deposit (CD)
A formal document issued by a bank showing indebtedness by the bank to the holder of the CD. Time certificates of deposit are payable at a future date and usually bear a specified rate of interest.


certified check
A depositor's check which the bank guarantees to pay. Usually the bank stamps the face of the check to indicate that it has been certified for payment. Less frequently used than the cashier's check.


certified public accountant (CPA)
A designation given to those who have passed a nationally uniform examination and who have served the necessary accounting internship. Even though the examination is nationally uniform, the licensing of CPAs is done by the state in which the accountant provides services.


CFP
Certified financial planner. A designation given by the Certified Financial Planner Board of Standards to those who have completed a course of study, passed a comprehensive exam, and met experience requirements.


charitable organization
For tax purposes, these are nonprofit organizations which must meet certain criteria to qualify for the tax-exempt status under the Internal Revenue Code. They are also referred to by the Code section that applies to them Section 501(c)(3) organizations. A contribution to these organizations is generally tax-deductible.


chart of accounts
A listing of account names and numbers used by a specific business for its accounting system. For example, under the Assets section of the chart of accounts you might see #101 Cash, #105 Accounts Receivable, #120 Inventory, #150 Equipment, etc. New accounts can be added as necessary to produce effective management reports. Grouping financial data into these accounts is done to produce reports that are useful to management.
See also financial statements.


child and dependent care credit
A federal income tax credit is allowed for a portion of the child care expenses paid by a taxpayer so he or she can work or attend school. To qualify for the credit, the taxpayer must maintain a household for certain qualifying dependents, such as a child or disabled parent.


child tax credit
Certain taxpayers who have children are entitled to a tax credit on their federal income tax return. The credit is granted for each qualifying child. The credit is phased out (not permitted) for upper income taxpayers.


churning
Churning takes place when a broker initiates trades on an investor's behalf that are excessive in size or frequency in relation to the investor's portfolio and that are against the investor's investment objectives as expressed to the broker. A disreputable broker "churns" for the purpose of generating commissions. Churning is a violation of the federal security laws.


close the books
At the end of an accounting year the books of a business are "closed." This requires the zeroing out of all revenue and expense accounts and reflecting the net profit or loss in the retained earnings account. This is accomplished by using a closing journal entry.


clouded title
A title to real estate that is not free and clear in the hands of the current holder. For example, perhaps a spouse had not signed a deed on a prior transfer. This missing signature causes an irregularity (a cloud) on the title and should be reason for concern for a prospective buyer.


CMA
Certified management accountant. A designation given by the Institute of Management Accountants to those who meet the organization's educational experience requirements.


COBRA
COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. This law guarantees certain ex-employees and their families the right to purchase continuation health insurance for at least 18 months after they leave a company.


COD (cash on delivery)
The buyer of a product parts with his or her money only when the product has been delivered to a specified location, normally the buyer's home or business. If a business is a bad credit risk or is a new buyer, a vendor may require that merchandise be shipped COD unless it is paid for in advance of the shipping date.


codicil
A written change to a will modifying, explaining, or altering the will.


coinsurance clause
A clause in an insurance contract limiting the insurance company's liability when property is underinsured. For example: If you insure a $200,000 building for only $100,000, you will not get fully reimbursed for a loss. If a fire caused $80,000 damage to your $200,000 structure, you would receive a prorated amount based on the extent to which you were underinsured. You would not receive the full $80,000.


collateral
Equity in property you own which you pledge as security for a loan.


common stock
The class of stock of a corporation that owns the net asset value of the corporation after taking into consideration all debts and preferred stock.


community property
Ownership of property by husband and wife in equal shares. The eight states that have community property laws are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, and Washington. Wisconsin has marital property laws that are similar to community property laws.


compiled financial statement
A compiled financial statement is prepared by an accountant from information furnished by the managers of a business. It is prepared without any verification as to the reasonableness of the information provided.
See also reviewed financial statements.


compound interest
Paying interest on both the principal and accumulated unpaid interest. In other words, paying interest on interest.
See also simple interest.


consumer price index (CPI)
The CPI is important to the financial markets, the business community, and to the general public because it represents the general increase or decrease in consumer prices. It is often used by businesses to establish new prices for products and services and to determine employee salary adjustments.


contingent liability
An obligation that could occur at some time in the future caused by an event in the past. Wow, where does that get you? It is an incomplete event that needs to be identified in the financial statements of a company even though it may be difficult to quantify. An example of such a liability would be a pending lawsuit.


cooling-off period
The purpose of the cooling-off law is to allow you a specified number of days after you make certain purchases to rescind the contract and get your money back. These laws were enacted to combat high-pressure tactics and deceptive salespeople. The laws tell you how much time you have and what steps you must take to cancel a contract.

The federal cooling-off rule specifies certain minimum rights for everyone. State cooling-off laws vary from state to state. Some state laws are more liberal than the federal law and provide the buyer even more rights to cancel purchase agreements. Contact your attorney for the specifics in your case.


copyright
The legal right to literary property, granting the owner exclusive right to reproduce and sell copies of the property.


corporation
A legal entity granted permission to operate by a state government.


corpus
The principal balance of a trust as opposed to the income from the trust.


cost basis
See both basis and adjusted basis.


cost of sales
A category in the financial statements of a business that gives the cost of all items sold during the time period covered by the profit and loss statement. "Cost of Sales" is subtracted from "Sales" on the profit and loss statement (income statement) to arrive at "Gross Profit."


coupon bond
A bond with interest coupons attached. The coupons are clipped and submitted to the bond holder for payment as the interest comes due.


credit
See debit.


credit line (line of credit)
An agreement whereby a bank or business will supply a specified maximum amount of money or merchandise to a customer on credit. The customer often borrows and repays from time to time as needed, but is limited to the agreed-upon maximum amount.


credit shelter trust
These trusts are sometimes called credit equivalent bypass trusts.
See also bypass trust.


current asset
Cash or items on the balance sheet that will be turned into cash in a relatively short period, usually a year or less. Current assets include such items as cash, accounts receivable, inventory, short-term investments, and prepaid expenses.


current liability
All short-term debt included on the balance sheet, including that portion of long-term debt which will be payable within one accounting period, usually one year.


current ratio
This is the ratio of current assets to current liabilities. It is desirable to have more current assets than current liabilities to enable the company to meet all of its current obligations without difficulty. A current ratio of 2 to 1 ($2 of current assets for each $1 of current debt) or greater is desirable.


custodial account
An account opened on behalf of another person. Commonly used when a parent opens an account for a minor child.


CUSIP number
CUSIP stands for Committee on Uniform Security Identification Procedures. The nine digit number, found on most current stock certificates, was established to help in clearing the huge numbers of stocks traded on the U.S. and Canadian stock exchanges. The international numbering system is called the CINS numbering system.
 

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