Financial Glossary

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I ( 113 DEFINITIONS )

Ideal conditions under certainty
Ideal conditions under certainty is an idealized situation in which the future cash flows of the firm and the interest rate in the economy are publicly known with certainty. top

Ideal standards
Ideal standards are standards that allow for no machine breakdowns or other work interruptions and require peak efficiency at all times. top

Identical properties
Identical properties are those properties such as shares, bonds, other securities, and so on that a taxpayer purchases at different times for different amounts and sells at different times for different amounts. To be identical, the properties must be identical in all respects. The cost base for identical properties acquired after 1971 is the moving average basis. top

Illegal acts
Illegal acts are violations of laws and regulations that are far removed from financial statement effects. top

Impairment
Impairment is the situation when an asset is no longer worth its net book value. This often triggers a writedown to a lower value. top

Impairment of value
Impairment of value is the loss of a significant portion of the utility or value of a capital asset. top

Implicit lease interest rate
The implicit lease interest rate is the rate of interest that discounts the minimum net lease payments to equal the fair value of the property at the beginning of the lease. top

Imputed interest
Imputed interest is an interest rate that is estimated and assigned based on the internal rate of return if an effective interest rate is not evident or determinable from other factors in a transaction. top

In vitro
In vitro means "from without (outside) the living organism" and is used when an individual considers whether a rule will be fair to all who follow it. top

In vivo
In vivo means "from within the living organism" and is used when individuals consider whether a rule will benefit them in their present situation. top

In-substances defeasance
In-substance defeasance is when a borrower places assets into an irrevocable trust to be used in retiring debt. The same economic principle as in defeasance except that the issuer retains final responsibility for debt; therefore, legal liability remains. top

Incentive-compatible
A contract is called incentive-compatible when the agent's incentive to take a given course of action is compatible with the prinicpal's best interest. top

Includes
For purposes of the ITA, "includes" means that the definition is not exhaustive and that the elements listed are only illustrations. top

Income
Income is a generic term indicating revenue from a variety of sources. Income is not to be confused with net income, which is revenue minus expenses. top

Income bonds
Income bonds are bonds which yield an interest stream only if the corporation has earned sufficient income (or operating cash flow) to enable payment of the interest. top

Income for accounting purposes
Income for accounting purposes is net income as prepared according to GAAP. top

Income for tax purposes (taxable income)
Income for tax purposes is arrived at by adjusting accounting net income to reflect allowable additions and deductions as per the ITA to arrive at net income for tax purposes. Basically, accounting net income is adjusted to reconcile it to net income for tax purposes (taxable income). top

Income from business
Income from business flows from the conduct of a business when it is carried out with the intention to profit. When an undertaking involves a reasonable expectation of profit, it is a commercial activity a business; however, when the undertaking has no reasonable expectation of profit, it is a hobby or personal venture. Note that while a business loss is deductible, the ITA makes no provision for the deduction of losses from a hobby or personal venture. top

Income from employment
Income from employment is recognized when an entity engages the service of an individual in return for salary, wages, and/or other taxable benefits. This contract between the employer and the employee is a contract of service. top

Income from office
Income from office is recognized when an individual holds a position that entitles the individual to a fixed or ascertainable remuneration. Usually the position the individual holds is created by statute, but it may be created by other means. top

Income from property
Income from property generally represents a return of invested capital such as interest, dividends, rents and royalties. It does not include a gain realized on the sale of the investment itself; rather, it is restricted to the regular return generated from the investment's ownership. Income from property is often referred to as passive income because the earning process requires little effort by the recipient. Note that rental income can be business income in certain circumstances. top

Income maximization
Income maximization is one of the types of earnings management. It involves choosing accounting policies that create a pattern of income maximization for the reported net income provided this does not put the numbers over the cap for bonus purposes. Firms that are close to debt covenant violation may also maximize income. top

Income minimization
Income minimization is similar to taking a bath but less extreme. This technique may be taken by a politically visible firm during periods of high profitability. Income taxation may also be a motivating factor in using this technique. top

Income of the corporation for the year from an active business (ABI)
Income of the corporation for the year from an active business (ABI) means the total of the corporation's income from an active business (ABI) carried on by it, including any income for the year pertaining to or incidental to that business. It does not include income from a source in Canada that is a property, such as interest or dividends. Furthermore, income received from an associated corporation that was deductible by that associated corporation in determining its ABI is considered to be ABI. top

Income smoothing
Income smoothing is a method of earnings management that managers engage in when they want to ensure that earnings remain between the bogey and the cap of a bonus plan. Income smoothing may smooth covenant ratios, making lending easier. Firms also smooth income to communicate its expected persistent earnings power. top

Income splitting
Income splitting occurs when income is shifted from a family member who has a high income to members who have low incomes. top

Income splitting tax ("Kiddie Tax")
In an effort to further discourage income splitting with minor children, especially through the use of family trusts, a special income splitting tax, effective January 1, 2000, was imposed on certain dividend or trust income received by minor children under 18 years of age. Tax on this type of income splitting is levied at the top marginal rate. top

Income statement
The income statement is the financial statement that shows whether the business earned a profit or suffered a loss. It lists the types and amounts of the revenues and expenses. top

Income summary account
The income summary account is a special account used only in the closing process to temporarily hold the amounts of revenues and expenses before the net difference is added to or subtracted from the owner's capital account or the retained earnings account for a corporation. top

Income Tax Act (ITA)
The Income Tax Act (ITA) is the main instrument in the study and practice of income tax law. It is the ultimate authority on tax law; all tax problems have to be analysed and resolved within the confines of the ITA. It sets out the rules by which the government levies income tax and reflects the tax policy of the government, that is, the provisions that govern who must pay taxes and how taxable income and income tax payable are determined and calculated. The laws contained within the ITA allow the government to tax the income of individuals and corporations so as to provide a reasonable and increasing source of revenue to finance ever-growing public expenditures and to implement the government's economic and social policies. top

Income Tax Application Rules (ITAR)
The Income Tax Application Rules (ITAR) consist of transitional rules needed to pass from the pre-1972 ITA to the ITA implementing the 1971 tax reform. top

Income Tax Regulations (REG)
The Income Tax Regulations (REG) specify the terms and conditions for applying the ITA. top

Incomplete markets
Incomplete markets exist if, when using market values rather than present values, there are assets and liabilities for which there is no market. top

Increasing transformations
Increasing transformations are irrelevant if your framing of a given decision is consistent. This means that adding or subtracting a constant dollar amount will not change profit-maximizing quantities. Or, in a simple two-frame example, the answer will be the same if you use consistent framing between total dollar analysis and relevant dollar only analysis. The total dollar analysis is considered an increasing transformation. top

Incremental analysis
Incremental analysis is an analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision in an organization. top

Incremental borrowing rate (for leases)
Incremental borrowing rate for leases, from the perspective of the lessee, is the interest rate that would be incurred by the lessee to finance an acquisition of a similar asset with similar terms and security. It is used as a discount rate in lease accounting when it is lower than the implicit rate of the lease or if the implicit rate is unknown. top

Incremental borrowing rate (IBR)
The incremental borrowing rate (IBR) is the rate that the borrower would have to pay its bank (or other lender) to borrow the same amount for the same period of time. It is also referred to as a market rate of interest. top

Incremental cost
An incremental cost is an increase in cost between two alternatives. top

Incremental method
The incremental method allocates the total consideration received for a bundle of securities or assets using the market value of one security as the basis for that security. The residual of the consideration received is allocated to the balance of the bundle. top

Index
An index is an imaginary portfolio designed to reflect the overall performance of the class of assets from which it is constructed. top

Indirect (secondary) financing
Indirect or secondary financing is financing whereby a lessor seeks to finance a lease arrangement (or a group of leases) by issuing bonds or commercial paper, which may or may not be secured by the lease agreements. top

Indirect cost
An indirect cost, also known as a common cost, is a cost that cannot be easily traced to the particular cost object under consideration. top

Indirect expense
An indirect expense is an expense associated with a period and not directly associated with revenue, e.g., administrative salaries. top

Indirect labour
Indirect labour is the labour costs of janitors, supervisors, material handlers, and other factory workers that cannot be conveniently traced directly to particular products. top

Indirect materials
Indirect materials are small items of material, such as glue and nails. These items may become an integral part of a finished product, but are traceable into the product only at great cost and inconvenience. top

Indirect preparation approach
The indirect preparation approach is a method of preparing the cash flow statement based on analyzing net income and the changes in related balance sheet accounts. top

Indirect presentation of operating activities
The indirect presentation of operating activities in the cash flow statement starts with net income, which is adjusted for non-cash expenses, gains, or losses plus changes in working capital to arrive at cash flow from operations. top

Influence costs
Influence costs are a type of agency cost incurred when an employee tries to influence a decision so that they benefit individually. top

Information
Information is evidence that has the potential to affect an individual's decision. top

Information asymmetry
Information asymmetry exists when one party has access to information that the other does not. In agency theory, the agent has an information advantage over the principal. top

Information Circulars (IC)
Information Circulars (IC) deal with administrative and assessment issues and are provided to explain CCRA policy about such matters as tax evasion, the collection of taxes, and the conduct of a tax audit. Like Interpretation Bulletins, Information Circulars are not legally binding. top

Information risk
Information risk is the probability that the financial statements distributed by a company will be materially false and misleading. top

Inherent risk
Inherent risk is the probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. top

Initial direct costs
Initial direct costs for leases are costs incurred by the lessor to initiate the lease. These include legal fees and sales commissions. They affect profit recognition over the life of the lease for direct financing leases and initial gross profit for sales type leases. top

Initial lease term
The initial lease term is the period of time during which a lessee is required to make lease payments. It is the length of the lease contract. It may be followed by a subsequent term if renewable. top

Injunction
An injunction is a legal settlement in which a person or company, without admitting or denying a violation of law, agrees not to violate the law in the future. top

Input device
An input device is a means of transferring information from source documents to the data processing component of an accounting system. top

Insider trading
Insider trading is the act of buying or selling assets in response to information that is not available to the general public. top

Insolvency
A firm is considered insolvent when it cannot meet its financial obligations as they become due. top

Inspection (as in test of controls procedures)
Inspection, as in test of controls procedures, is when auditors look to see whether the documents were marked with an initial, signature, or stamp to indicate they had been checked. top

Instalment accounts receivable
Instalment accounts receivable are accounts receivable that allow the customer to make periodic payments over several months and that typically earn interest for the seller. top

Instalment notes
Instalment notes are promissory notes that require the borrower to make a series of payments consisting of interest and principle. top

Instalment sales method of accounting
Instalment sales method of accounting is a system that recognizes proportionate revenue at each instalment payment date rather than at the time of delivery. top

Institution-based trust
Institution-based trust generalizes beyond a given transaction and specific exchange partners. Social practices within which trust is embedded come to be accepted as social facts: the way things are and have always been. Three broad classes of institutional elements create and maintain institutional trust; individual- and firm-specific actions, intermediaries, and regulations. top

Intangible capital assets
Intangible capital assets are those capital assets that do not have physical presence. Examples would include goodwill, trademarks, and trade names. top

Integrated foreign operations
Integrated foreign operations are subsidiaries that are not financially or operationally independent. top

Integrity
Integrity is the ability to act in accordance with the highest moral and ethical values all the time. top

Inter-period income tax allocation
Inter-period income tax allocation is the process of reallocating a total multi-year income tax assessment to accounting years on the basis of the accounting recognition of taxable revenue, gains, expenses, and losses. top

Interdepartmental services
Interdepartmental services, also known as reciprocal services, are services provided between service departments. top

Interest
Interest is the charge assessed for the use of money. top

Interest (for tax purposes)
Interest is interpreted by CCRA and the courts to be the return, consideration, or material compensation for the use or retention by one person of a sum of money that belongs to, or is owed to, another person. Payments need only be characterized as in connection with, incidental to, or arising from the borrowing in order to be considered as interest. top

Interest expense
Interest expense is the cost recorded of borrowed money. top

Interest group theory
The interest group theory of regulation suggests that individuals form coalitions, or constituencies, to protect and promote their interest by lobbying the government or other regulation-setting agencies. These coalitions are viewed as being in conflict with each other to obtain their share of benefits from regulation. top

Interest method
The interest method is a method of recognizing interest income or expense on amounts due to or from a corporation where the interest amount is a constant percentage of the opening net balance. It is also known as the effective interest method or scientific method. top

Interest payment dates
Interest payment dates are the dates on which interest payments are due. top

Interest rate parity theory
The interest rate parity theory explains movement in foreign exchange rates as being caused by market forces that are reacting to disparities in interest rates between countries. Higher interest rates in one country will encourage capital to flow into that country, creating a demand for that country's currency and thereby driving the value of that country's currency higher. top

Interest rate swap
An interest rate swap is an agreement between two borrowers to pay each other's interest costs. For example, a company may prefer fixed rate debt to reduce uncertainty, while a foreign company may be looking for more stable or favourable floating rates. top

Interest rate used for discounting net lease payments
The interest rate used for discounting net lease payments is, for the lessee, the lower of the lessor's interest rate implicit in the lease and the lessee's incremental borrowing rate. For the lessor it is the interest rate implicit in the lease. top

Interest revenue
Interest revenue is revenue provided as a return on loaned money. top

Interest-bearing
Interest-bearing describes notes that have a specific interest rate to be applied to their face value in computing interest payments. top

Interest-rate risk
Interest-rate risk is the potential for gains or losses resulting from fluctuations in the market price of fixed income securities. Such price fluctuations are a consequence of changes in prevailing interest-rate levels. top

Interim audit work
Interim audit work consists of procedures performed several weeks or months before the balance sheet date. top

Interim statements
Interim statements are financial statements prepared for less than a full fiscal year, usually monthly or quarterly and usually unaudited. top

Internal accounting control
Internal accounting control is the plan of organization and procedures designed to prevent, detect, and correct accounting errors that may occur and get recorded in ledger accounts and financial statements. top

Internal auditing
Internal auditing is also known as management auditing, operational auditing, or performance auditing. It is the study of business operations for the purpose of making recommendations about the economic and efficient use of resources, effective achievement of business objectives, and compliance with company policies. top

Internal auditors
Internal auditors are persons employed within organizations for audit assignments. top

Internal control questionnaire
An internal control questionnaire is a checklist used in a formal interview with knowledgeable managers. top

Internal control structure
The internal control structure consists of a company's control environment, accounting system, and control procedures. The existence of a satisfactory internal control structure reduces the probability of errors and irregularities in the accounts. top

Internal evidence
Internal evidence consists of documents that are produced, circulated, and finally, stored with the client's information system. top

Internal failure costs
Internal failure costs are costs incurred when a non-conforming product is detected before it is shipped to customers. top

Internal labour markets
An internal labour market consists of an employer and long-term employees. These markets are also characterized by limited ports of entry for hiring, career paths within the firm, and promotions from within. top

Internal rate of return
The internal rate of return is relevant to certain types of decisions and will need to be determined or approximated. The internal rate of return is the interest rate (also called the discount rate) that makes the net present value of the investment equal zero. The internal rate of return is compared with the required rate to determine if the investment generates a rate that is equal to or greater than the required rate. top

Internal transaction
An internal transaction is a term occasionally used to describe economic events that affect an entity's accounting equation but that are not transactions between two parties. top

International Accounting Standards Board (IASB)
The International Accounting Standards Board (IASB) is an association of professional accounting bodies from around the world whose purpose is to develop and issue international accounting and reporting standards. top

Interpretation Bulletins (IT)
Interpretation Bulletins (IT) are issued by CCRA and contain its interpretation of specific aspects of tax law. They reflect CCRA policy; however, they are considered quasi-legal in nature and thus are not legally binding. top

Interpretation of the ITA
Clear and unambiguous words used in the ITA must be given their ordinary meaning unless they are defined in the ITA. Specific provisions in the ITA prevail over general provisions when there is a conflict between the two. Government interpretations such as Interpretation Bulletins, Information Circulars, Advance Tax Rulings, and case law (court decisions) are also used to interpret the ITA. top

Intraperiod income tax allocation
Intraperiod income tax allocation is the disaggregation of the components of income tax according to the nature of the income, gains, and losses giving rise to the tax. top

Inventoriable costs
Inventoriable costs, also known as product costs, are all costs that are involved in the purchase or manufacture of goods. In the case of manufactured goods, these costs consist of direct labour, direct material, and manufacturing overhead. top

Inventories
Inventories are goods held for resale. top

Inventory appraisal system
An inventory appraisal system is a system under which capital assets are appraised at the end of each accounting period in their present condition. Amortization is recorded as the decline in value over the period. top

Inventory carrying costs
Inventory carrying costs are those costs associated with the holding of inventory, such as rental of storage space, handling costs, property taxes, insurance, and interest on funds. top

Inventory ordering costs
Inventory ordering costs are those costs associated with the acquisition of inventory, such as clerical costs and transportation costs. top

Inventory profit
Inventory profit is also known as phantom profit. It is the difference between the cost of goods sold and their replacement cost. top

Inventory turnover
Inventory turnover is the frequency with which a company sells its average inventory balance in the year. It is a measure of the company's ability to generate sales on inventory. top

Investing activities
Investing activities are transactions that involve making and collecting loans or that involve purchasing and selling capital assets, other productive assets, or investments other than cash equivalents. This is a section of the cash flow statement that deals with these types of transactions. top

Investment centre
An investment centre describes an organizational architecture in which managers are delegated decisions rights over input mix, product mix, sales prices and quantities, and decision rights over capital expenditures. top

Investment expenses
Investment expenses include such deductions from income (mostly property income) as interest, investment counselling fees, rental losses, inactive partnership losses, capital losses of other years applied to capital gains ineligible for the CGD, and certain amounts of tax-shelter writeoffs. top

Investment income
Investment income includes such income (generally property income) as interest income, grossed up dividend income, rental income, and taxable capital gains ineligible for the CGD. top

Investment tax credit
An investment tax credit is a direct, dollar-for-dollar offset against income tax payable for specific types of expenditures made by businesses. It is designed by government to encourage specific types of investment, usually capital investment. top

Invoice
An invoice is an itemized statement prepared by the vendor that lists the customer's name, the items sold, the sales prices, and the terms of sale. top

Involuntary dispositions
Involuntary dispositions are the disposals of assets that are not based on the company's managers' decisions. top

Irregularities
Irregularities are intentional misstatements or omissions in financial statements, including fraudulent financial reporting (management fraud) and misappropriations of assets (defalcations). top

ISO 9000 standards
ISO 9000 standards are quality control requirements issued by the International Standards Organization that relate to products sold in European countries. top