A tariff is a protectionism tax imposed on imported and exported goods with the aim of generating government revenues and protecting the domestic economies and infant industries from global competition.
Explanation :
Tariffs are a trade policy tool that seeks to generate additional revenue for governments and domestic producers. Import and export taxes inflate the prices of imported goods, causing a decline in imports and shifting consumers to the consumption of domestic goods.The price increase in the imported goods encourages domestic producers to increase the output of production, thus realizing higher revenues. On the other hand, the shift of resources to domestic industries restricts free trade, as domestic producers may be more efficient than foreign producers. Furthermore, tariffs are viewed as a tool for transferring money to the government through higher consumer prices and higher producer revenues.
In a nutshell :
- Governments impose tariffs to raise revenue, protect domestic industries, or exert political leverage over another country.
- Tariffs often result in unwanted side effects, such as higher consumer prices.
- Tariffs have a long and contentious history and the debate over whether they represent a good or bad policy rages on to this day.
The useful life of an asset, often called the service life, is the length of time an asset can be productively used in operations. In other words, this is the amount of time an asset is able to be used productively. Keep in mind that this isn’t the amount of time an asset continues to run or remain usable. This is the amount of time a business can productively use the asset.
Explanation :
When determining the useful life of an asset, accountants generally look at two things: inadequacy and obsolescence. Inadequacy refers to the ability of the asset to perform its duties productively. In our computer example, the older machines would be inadequate because they can’t run updated software efficiently. Obsolescence deals with the fact that older computers are not up to date with current standards. For instance, a computer with a 5 GB hard drive was unfathomable in 1991. Today this computer would be completely worthless. The operating system wouldn’t even be able to fit on this machine.
In a nutshell :
- The useful life of an asset is an accounting estimate of the number of years it is likely to remain in service for the purpose of cost-effective revenue generation.
- The Internal Revenue Service employs useful life estimates to determine the amount of time during which an asset can be depreciated.
- There are a variety of factors that can affect useful life estimates, including usage patterns, the age of the asset at the time of purchase and technological advances.
An unrealized gain is the increase in value of an investment before it has been sold. An unrealized gain takes place before a transaction has actually occurred. That is why the gain is considered unrealized. It is never actually recorded in the accounting system because the gain hasn’t actually materialized yet.
Explanation :
Another example of unrealized gains is investments that are actively managed and meant to be sold within the next year. These investments are usually called trading securities. As with any stocks and bonds, the prices fluctuate from minute to minute. If a stock is up, it is considered an unrealized gain. Unlike the property in the example above, unrealized gains from trading securities are reported on the income statement. Since these investments are supposed to be sold in the near future, it is fairly conservative to account for them as if they were sold.
In a nutshell :
- An unrealized gain is a theoretical profit that exists on paper, resulting from an investment that has not yet been sold for cash.
- Unrealized gains are recorded on the financial statements differently depending on the type of security, whether they are held-for-trading, held-to-maturity, or available-for-sale.
- Gains do not affect taxes until the investment is sold and a realized gain is recognized.
- If an investment is held for longer than a year, the profit is taxed at the capital gains tax rate.
- An unrealized loss is the opposite of an unrealized gain where an investment has decreased in value but has not yet been sold.
An unfavorable variance occurs when the difference between actual revenues and costs compared with the budgeted revenues and costs results in a lower net income. In other words, management’s budgeted and projected revenues and expenses resulted in a higher net income than the actual net income.
Explanation :
Most companies prepare budgets to help track expenses and achieve financial performance goals. There are many different forms of budgets as well as planning strategies, but most budgets start the same way. Management analyzes the past performance of the company and estimates future performance based on expected market and economic changes. Then management projects a budget and goals for the upcoming year.
In a nutshell :
- Unfavorable variance is an accounting term that describes instances where actual costs are higher than the standard or projected costs.
- An unfavorable variance can alert management that the company’s profit will be less than expected.
- The unfavorable variance could be the result of lower revenue, higher expenses, or a combination of both.
Unemployment rate is the percentage of the workforce that is not currently employed but is willing to work and actively seeking paid work.
Explanation :
The unemployment rate formula is calculated by dividing the number of unemployed individuals in the workforce by the total labor force. This main category of unemployed people is typically broken down into four different categories based on how they affect the economic system: structural, frictional, cyclical, and long-term. Structural unemployment describes a situation where there are too many workers with one set of skills and not enough jobs in the economy that need that set of skills. Frictional unemployment describes the time workers spend in between jobs. This is a temporary loss of work that occurs when someone quits a job before finding another.
In a nutshell :
- The unemployment rate is the proportion of the labor force that is not currently employed but could be.
- There are six different ways the unemployment rate is calculated by the Bureau of Labor Statistics using different criteria.
- The most comprehensive statistic reported is called the U-6 rate, but the most widely used and cited is the U-3 rate
- The U-3 unemployment rate for January 2022 was 4%
Unearned revenue, also called deferred revenue, is the liability or amount of money owed for payment of goods or services by a customer before the goods or services have been delivered to that customer. In other words, if a customer pays for a good or service before the company delivers it, the company has to recognize that it owes the customer for that good or service.
Explanation :
GAAP requires businesses to use the accrual basis of accounting. This means that all revenues are recorded when earned regardless of when the cash is actually received. In other words, a customer who buys a shirt on December 31 and pays for it on January 1 is considered to have bought the shirt on December 31. The retailer records a December sale. This concept also applies for customers who put down deposits on sales. Since the good or services haven’t been delivered or performed yet, the company hasn’t actually earned the revenue. It records a liability until the company delivers the purchased product.
In a nutshell :
- Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered.
- It is recorded on a company’s balance sheet as a liability because it represents a debt owed to the customer.
- Once the product or service is delivered, unearned revenue becomes revenue on the income statement.
- Receiving funds early is beneficial to a company as it increases its cash flow that can be used for a variety of business functions.
Vouching, widely recognized as “the backbone of auditing,” is a component of an audit seeking to authenticate the transactions recorded in a firm’s book of accounts. When an accounting transaction is vouched, it is tested and verified by presenting relevant documentary evidence
Explanation :
Seeking to establish the accuracy of recorded transactions, vouching ensures that all the entries in the books of accounts come with the relevant evidence, including invoices, receipts, and others. Vouching does not take into account the non-business transactions, thus helping auditors to ensure that all transactions in a firm’s book of accounts are business-related. Auditors confirm that the amounts mentioned in each transaction are truthful, disclosing the nature of a transaction, and its authorization.
In a nutshell :
- Vouching is a technical term that refers to the inspection of documentary evidence supporting and substantiating a financial transaction, by an auditor. It is the essence of auditing
- Vouching is the practice followed in an audit, with the objective of establishing the authenticity of the transactions recorded in the primary books of account.
- It essentially consists of verifying a transaction recorded in the books of accounts with the relevant documentary evidence and the authority on the basis of which the entry has been made.
- Also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the final statements of account. Vouching does not include valuation
Undervalued stocks are securities that trades lower than its fair market value, i.e. the value that the company’s cash flow and return on assets justify. Undervalued securities are expected to increase rapidly, and make up for good “buy” opportunities.
Explanation :
Undervalued securities have a market price that is significantly lower than their fair value (market value < fair value) as a result of decreasing investor confidence or consensus estimates. Financial analysts use the price to earnings ratio (P/E) or calculate the growth rate of a firm to determine if a stock is undervalued. Stocks are deemed as undervalued either following a decline in demand driven by declining investor confidence or if the firm’s fundamentals improve rapidly while the market price remains constant. In both cases, if the company’s fundamentals and the analyst growth projections do not justify a decline in the market price, the stock is possibly undervalued.
In a nutshell :
- An asset that is undervalued is one that has a market price less than its perceived intrinsic value.
- Buying undervalued stock in order to take advantage of the gap between intrinsic and market value is known as value investing.
- For a stock to be undervalued means that the market price is somehow “wrong” and that the investor either has information not available to the rest of the market or is making a purely subjective, contrarian evaluation.
An unclassified balance sheet, on the other hand, does not group asset and liability accounts into categories. Instead, an unclassified balance sheet lists all assets in order of liquidity starting with assets like cash and accounts receivable.
Explanation :
Balance sheets that are issued to investors and creditors are almost always classified balance sheets. These balance sheets split the asset and liability accounts into important categories like current assets, noncurrent assets, fixed assets, current liabilities, noncurrent liabilities, and shareholder loans. These classifications are important to investors and creditors because investors and creditors use these classifications to analyze the business performance and improvement over time. Investors and creditors use ratios like the quick ratio and acid test ratio that depend on accurate balance sheet classification.
In a nutshell :
- An unclassified balance sheet does not provide any sub-classifications of assets, liabilities, or equity.
- Instead, this reporting format simply lists all normal line items found in a balance sheet in their order of liquidity, and then presents totals for all assets, liabilities, and equity.
- This approach does not include subtotals for any of the following classifications:
- Current assets
- Long-term assets
- Current liabilities
- Long-term liabilities
- The liabilities are listed in order of term. Short-term liabilities like accounts payable are listed first followed by long-term debt.
A vendor is a company that sells goods or supplies to other companies sometimes called vendees. Many vendees place orders with vendors over the phone, fax, or internet. These orders are placed with a document called a purchase order. A purchase order authorizes the vendor to ship specific supplies to the vendees at a specified price. The vendee fills out the purchase order with a description of goods to be ordered as well as shipping information and applicable dates.
Explanation :
Almost all businesses buy inventory or supplies from other companies. Not all businesses sell inventory or supplies to other companies. Some companies like retailers sell products directly to the public. Companies that do sell supplies or inventory to other companies are typically called vendors. A vendor is a party in the supply chain that makes goods and services available to companies or consumers. The term “vendor” is typically used to describe the entity that is paid for goods that are provided, rather than the manufacturer of the goods itself. However, it is possible for a vendor to operate as both a supplier (or seller) of goods and a manufacturer.
In a nutshell :
- A vendor is a general term used to describe any supplier of goods or services.
- A vendor sells products or services to another company or individual.
- Large retailers, like Target, rely on many different vendors to supply products, which it buys at wholesale prices and sells at higher retail prices.
- A manufacturer that turns raw materials into a finished good is a vendor to retailers or wholesalers.
- Some vendors, like food trucks, sell directly to customers.
