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3 THE ACCOUNTING CYCLE:CAPTURING ECONOMIC EVENTS

HIGHLIGHTS OF THE CHAPTER


1. The effects of business transactions are recorded in accounting records called journals and ledgers. The recorded data then are used to prepare financial statements and other accounting reports at periodic intervals. Transactions are recorded first in a journal, and the data is later transferred to the ledger. We can best illustrate the nature of these accounting records if we discuss the ledger first. A ledger account may be viewed as the smallest unit of storage in an accounting system. n a manual system, each ledger account is represented by a separate page in a binder. n a computeri!ed system, of course, each unit of storage is maintained electronically using general ledger software. "ut each general ledger account can still be viewed separately. $ach ledger account lists all of the increases and decreases in a particular financial statement account, and also indicates the account%s current &balance.' n its simplest form a ledger account may be viewed as having two sides. The left side of the account is called the debit side) the right side is called the credit side. nformation entered on the left side of a ledger account are called debit entries. nformation entered on the right side of a ledger account are called credit entries. ,or all asset accounts, increases are recorded by debit entries, and decreases are recorded by credit entries. ,or all liability accounts and owners' equity accounts, increases are recorded by credits, and decreases are recorded by debits. The debit and credit rules for recording revenue and e/penses are based upon the changes they cause in owners0 e1uity. 2evenue increases owners0 e1uity) therefore, revenue is recorded by credit entries. $/penses decrease owners0 e1uity and are recorded debits. The double4entry system of accounting re1uires that equal dollar amounts of debits and credits be recorded for every transaction. 5irtually every business maintains a journal as a record of &original' entry. A journal is a chronological listing of all transactions in the order they occur. The journal shows all information about each transaction6 7a8 the date of the transaction, 7b8 the accounts debited and credited, and 7c8 a brief e/planation of the transaction. After a transaction has first been recorded in the journal, each debit and credit is later transferred to the appropriate ledger accounts. This transfer is called posting. Two things can cause changes in owners0 e1uity6 7a8 owner investments and dividends, and 7b8 profits or losses resulting from the operation of the business. 9rofits increase owners0 e1uity, and may either be distributed to the owners or reinvested in the business to help finance e/pansion and growth. :osses, however, reduce owners0 e1uity, ma;ing the owners worse off, economically. Net income is the term most often used to describe increases in owners0 e1uity resulting from profitable operations. Net loss is the term used to describe decreases in owners0 e1uity resulting from unprofitable operations.

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<et income is computed by deducting expenses incurred during the accounting period from revenue earned during the period. <et income for each accounting period is reported in a financial statement called an income statement. An income statement covers a span of time, whereas a balance sheet shows a company%s financial position at one particular date. The need to relate net income to a period of time is called the time period principle. Revenue is the price charged to customers for goods sold and services rendered during the accounting period. 2evenue is not necessarily &cash' flowing into a business. 2ather, it is the amount &earned' during the period. 2ecogni!ing revenue as it is &earned' illustrates the realization principle. =ash received from customers may be received by a business before revenue is earned, after revenue is earned, or at the same time that revenue is earned. Expenses are the cost of goods and services incurred in the effort to generate revenue. $/penses are typically recorded as &resources' are used up, regardless of when payment for the resources is made. Thus, cash may be paid before resources are used up, after resources are used up, or at the same time that resources are used up. An income statement shows the revenue earned during the period and the e/penses incurred during the period in generating that revenue. This policy of offsetting revenue with related e/penses is called the matching principle. "usinesses often purchase assets that will be &used up' over two or more accounting periods. The matching principle re1uires that an effort be made to allocate an appropriate portion of the asset%s cost as an e/pense in each period that the asset helps the business to earn revenue. At the end of the accounting period, when all entries in the journal have been posted to the ledger, the debit or credit balance of each account is computed. These balances are listed in a trial balance. The trial balance is a two4column schedule listing all of the accounts in the order they appear in the ledger. >ebit account balances are shown in the left column and credit account balances are shown in the right column. ?ince the total of the debit balances should e1ual the total of the credit balances, the two columns will be equal if the ledger is in balance. @owever, the amounts shown are not necessarily the correct amounts. The trial balance is not a formal financial statement, but merely a preliminary step to preparing financial statements. The accounting procedures covered in this chapter were part of what is referred to collectively as the accounting cycle. The accounting cycle involves eight steps6 7a8 journali!ing transactions 7b8 posting journal entries to ledger accounts, 7c8 preparing a trial balance, 7d8 ma;ing adjusting entries, 7e8 preparing an adjusted trial balance 7f8 preparing financial statements from the adjusted trial balance figures, 7g8 closing appropriate accounts, and 7h8 preparing an after4closing trial balance. n this chapter we have illustration d steps a4c of the accounting cycle. n =hapters # and (, the remaining steps will be addressed.

TEST YOURSELF ON THE ACCOUNTING CYCLE True or False ,or each of the following statements, circle the T or the , to indicate whether the statement is true or false.

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1. 2. 3. #.

n a prosperous and solvent business the accounts with credit balances will normally e/ceed in total dollar amount the accounts with debit balances. The term debit may signify either an increase or a decrease) the same is true of the term credit. A business transaction is always recorded in the ledger by entries to two or more different ledger accounts. An entry on the left side of a ledger account is called a debit entry and an entry on the right side is called a credit entry, regardless of whether the account represents an asset, a liability, or owners0 e1uity. Accounts representing items which appear on the left4hand side of the balance sheet usually have credit balances. A trial balance with e1ual debit and credit totals proves that all transactions have been correctly journali!ed and posted to the proper ledger accounts. The se1uence of the account titles in a trial balance depends upon the si!e of the account balances. A journal entry may include debits to more than one account and credits to more than one account but the total of the debits must always e1ual the total of the credits. f a business transaction is recorded correctly, it cannot possibly upset the e1uality of debits and credits in the ledger. n a journal entry recording the purchase of a des; for A2+(.-3, both the debit and credit were recorded and posted as A2(+.-3. This transposition error would not be disclosed by the preparation of a trial balance. The double4entry accounting system means that transactions are recorded both in the journal and in the ledger. An income statement relates to a specified period time whereas a balance sheet shows the financial position of a business at a particular date. The reali!ation principle states that a business should never record revenue until cash is collected from the customer. $/penses cause a decrease in owners0 e1uity and are recorded by debits. f cash receipts are A13,333 greater than total e/penses for a given period, the business will earn a net income of A13,333 or more. The journal entry to recogni!e a revenue or an e/pense usually affects an asset or liability account as well.

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Bnder accrual basis accounting, revenue is recogni!ed when cash is received, and e/penses are recogni!ed when cash is paid. An e/pense may be recogni!ed and recorded even though no cash outlay has been made. "uying a building for cash is just e/changing one asset for another and will not result in an e/pense even in future. 2evenue increases owners0 e1uity and is recorded by a credit.

Completion Statements ,ill in the necessary word to complete the following statements6 1. ncreases in assets are recorded by CCCCCCCCCCC, and decreases in assets are recorded by credits) increases in accounts appearing on the right side of a balance sheet are recorded by CCCCCCCCCCC, while decreases in those accounts are recorded by CCCCCCCCCCCCC. n accounting, the term debit refers to the CCCCCCCCC side of a CCCCCCCCC CCCCCCCC, while the term credit refers to the CCCCCCCCCCCCCside. Asset accounts appear on the CCCCCCCCCCC side of the balance sheet and normally have CCCCCCCCCCCCbalances. :iability and owners0 e1uity accounts appear on the CCCCCCCCCCCCCC side of the balance sheet and normally have CCCCCCCCCCCbalances. When a company borrows from a ban;, two accounts immediately affected are CCCCCCCCCCCCC and CCCCCC CCCCCCCCCCCCCCCC. The journal entry to record the transaction re1uires a CCCCCCCC to the first account and a CCCCCC to the second one. A CCCCCCCCCCC CCCCCCCCCCCCCis prepared from the ledger accounts at the end of the month 7or other accounting period8 in order to prove that the total accounts with CCCCCCC CCCCCCCCCCCCC is e1ual to the total accounts with CCCCCCCCCC CCCCCCCCCCCCCCCCCCC. The CCCCCCCCCCCCCC principle of accounting states that revenue should be recogni!ed in the period that it is earned. The CCCCCCCCCCCCCCCC principle indicates that e/penses should be recogni!ed in the period in which they help produce CCCCCCCCC. The principle distinction between e/penses and dividends is that e/penses are incurred for the purpose of CCCCCCCCCCCCCC CCCCCCCCCCCCCC.

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Multiple Choice =hoose the best answer for each of the following 1uestions and enter the identifying letter in the space provided. CC 1. A ledger contains a separate &account' for each6
a. b. c. d. "usiness transaction. "usiness day. Asset, liability, and element of owners0 e1uity. Dournal entry.

CC

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Which of the following statements about the rules for debiting and crediting balance sheet accounts is not trueE
a. b. c. d. :iability accounts are reduced by debit entries. Accounts on the left side of the balance sheet are reduced by credit entries. $ach transaction is recorded by e1ual dollar amounts of debits and credits. Fwners0 e1uity accounts and asset accounts are increased by the debit entries. s recorded by e1ual dollar amounts of debit and credit entries. s recorded in both the journal and the ledger. Affects both sides of the balance sheet. s both recorded and posted. A listing of the balances of the accounts in the ledger. A storage center of information within a computer4based system. A chronological record of individual business transactions. a separate &account' for each asset, liability, and element of owners0 e1uity.

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The ;ey point of double entry accounting is that every transaction6


a. b. c. d.

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A journal consists of6


a. b. c. d.

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The purpose of a trial balance is6


a. b. c. d. To determine that journal entries are in balance before posting those entries to the ledger. To indicate the effects of business transactions. To prove the e1uality of debits and credits in the ledger. To determine that the number of ledger accounts with debit balances is e1ual to the number of credit balances.

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2ed @ill 5ineyards completes a transaction which causes an asset account to decrease. Which of the following related effects may also occurE
a. b. c. d. An increase of e1ual amount in a liability account. An increase of an e1ual amount in owners0 e1uity. An increase of an e1ual amount in another asset account. <one of the above. 2e1uires that all companies prepare monthly, 1uarterly, and annual financial statements. nvolves dividing the life of a business entity into accounting periods of e1ual length. 2e1uires all companies to use a fiscal year ending >ecember 31. ?tems from the nternal 2evenue ?ervice re1uirement that ta/able income be reported on an annual basis. ndicates that a business should record revenue when services are rendered or merchandise sold is delivered to customers, even if cash has not yet been received. ndicates that revenue should be recogni!ed in the accounting period when cash is received, even if the business has not yet performed all the re1uired services. ndicates that revenue should be recorded only after two conditions have been met6 718 the earning process is complete, and 728 the cash has been collected. 9rovides guidelines as to when e/penses should be recogni!ed.

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The time period principle6


a. b. c. d.

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The realization principle6


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b. c. d.

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A produce supplier enters into a contract with a supermar;et chain on ?eptember to deliver pump;ins in Fctober. The pump;ins are delivered on Fctober 1# at a price of A#,333, A2,333 payable on <ovember 1, and A2,333 >ecember 1. When should the produce supplier record the A#,333 as revenueE
a. b. c. d. ?eptember -. Fctober 1#. A2,333 <ovember 1, and A2,333 >ecember 1. When the supermar;et sells the pump;ins.

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CC

13.

The matching principle implies that e/penses6


a. b. c. d. ?hould be deducted from revenue in the period which the suppliers of the goods or services are paid. ,or a period should be e1ual in amount to the revenue recogni!ed during the period. ?hould be deducted in the period in which use of the related goods or services help to produce revenue. ?hould be e1ual to the cash payments made during the period.

CC

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Fn April 1, @udson =ompany received and paid a A+33 bill for advertising done in Garch. n addition to this bill, the company paid A*,133 during April for e/penses incurred in that month. Fn Gay 2, @udson =ompany paid a A#,*33 payroll to employees for wor; done in April. "ased on these facts, total e/penses for the month of April were6
a. b. c. d. A *,133. A *,-33. A13,+33. A11,#33. ncrease an asset account. >ecrease the =apital ?toc; account. >ecrease a liability account. ncrease a liability account.

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f a journal entry recogni!es an e/pense, the entry might also6


a. b. c. d.

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E ercises 1. :isted below are eight technical accounting terms emphasi!ed in this chapter. !rial "alance %ebit Revenue Net income #ccounting $ycle Realization principle #ccrual accounting $redit

$ach of the following statements may 7or may not8 describe one of these technical terms. n the space provided below each statement, indicate the accounting term described, or answer &<one' if the statement does not correctly describe any of the terms. a. An eight4step process by which economic events are initially captured and transformed into financial statements. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC The price of goods sold and services rendered during the period. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC 2evenue earned less e/penses incurred during the period. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC A two4column schedule listing all of the accounts in the general ledger and their respective balances. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC The generally accepted accounting principle that e/penses are to be recogni!ed in the period that the related e/penditure helps to produce revenue. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC The right4hand side of a ledger account. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC The techni1ue of recogni!ing revenue when it is earned and e/penses when the related goods and services are used, without regard to when cash is received or paid. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC

b. c. d.

e.

f. g.

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?how the change in total assets, total liabilities, and total owners0 e1uity that will be caused by posting each amount in the following journal entries. n the effect of transaction row, show the total change in assets, liabilities, and owners0 e1uity that has occurred after all parts of the transaction have been posted. @int6 The effect of each transaction should be that the total change on the left side of the balance sheet 7change in assets8 should e1ual the change on the right side 7change in liabilities H change in owners0 e1uity8. $/planations have been omitted from journal entries to conserve space. #r Cr 1(3 #(3 Assets H*33 41(3 H#(3 1,233 I (,333 H I H#(3 H#(3 H 3 $ Lia%ilities & O'ners( E)uit"

!ournal Entr"

E ample6 Fffice $1uipment................................ *33 =ash ...................................... Accounts 9ayable................... E**ect o* transaction a. =ash ............................................... 1,233 Accounts 2eceivable.............. E**ect o* transaction b. =ash ............................................... (,333 =apital ?toc;.......................... E**ect o* transaction c. =ash ............................................... 3,-33 <otes 9ayable........................ E**ect o* transaction d. Accounts 9ayable............................ 3(3 =ash....................................... E**ect o* transaction e. :and ............................................... .,333 =ash....................................... <otes 9ayable........................ E**ect o* transaction

3,-33 I 3(3 I 1,333 -,333 I H H H

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A list of accounts for Dones =ompany is given below followed by a series of transactions. ndicate the accounts that would be debited and credited in recording each transaction by placing the appropriate account number7s8 in the space provided 1. =ash 2. Accounts 2eceivable 3. Fffice $1uipment #. Accumulated >epreciation6 Fffice $1uipment 21. <otes 9ayable 22. Accounts 9ayable 31. =apital ?toc; 3(. 2etained $arnings #1. All 2evenue Accounts (1. All $/pense Accounts ... >ividends Transactions E ample 9urchased office e1uipment, paying part cash and issuing a note payable for the balance a. 9aid creditor amount due on open account b. =ollected from customer for services performed by Dones =ompany in previous period c. Btility bill is received) payment will be made in 13 days d. 9erformed services for a customer) A(3 cash received and the balance due in 33 days e. Fffice e1uipment purchased giving note payable f. Gade a =ash distribution to the stoc;holders. Accounts+s, #e%ite3 Accounts+s, Cre-ite1,21

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ndicate the effects that each of these transactions will have upon the following si/ total amounts in the company%s financial statements for the month of Gay. Bse the code letters & for ncrease, % for >ecrease, and NE for <o $ffect. Income Statement .alance Sheet
Total Re/enue ' Total E penses NE Net Income ' Total Assets ' Total Lia%ilities NE O'ners( E)uit" '

Error E ample0 2endered services to a customer and received immediate payment in cash but made no record of the transaction a. 9ayment for repairs erroneously debited to "uilding account b. 2ecorded collection of an account receivable by debiting =ash and crediting a revenue account. c. 2ecorded twice revenue earned on account. d. 2ecorded twice a purchase of offices supplies on credit e. 2ecorded the purchase of office e1uipment for cash as a debit to Fffice e/pense and a credit to cash. f. 2ecorded cash payment for advertising by debiting 2epairs $/pense and crediting Accounts 9ayable.

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SOLUTIONS TO CHA1TER 2 SELF3TEST True or False 1. F 2egardless of whether a business is solvent or profitable, the sum of accounts with credit balances 7normally :iabilities and Fwners0 $1uity8 will always e1ual the sum of accounts with debit balances 7assets8. T The term debit means an entry on the left4hand side of an account, and credit means an entry on the right4hand side of an account. Whether the entry results in an increase or decrease depends upon the type of account affected. T $1ual dollar amounts of debit and credit entries are needed to record each transaction. Although more than two accounts may be affected, a transaction would never involve just a single account. T "y definition, a debit is an amount recorded on the left4hand side of an account and a credit is an amount recorded on the right4hand side of an account. F :iability and owners0 e1uity accounts normally have credit balances. These accounts appear on the right4hand side of the balance sheets illustrated in your te/t. F A &balancing' trial balance only gives assurance that 7a8 e1ual debits and credits have been recorded, 7b8 the balance of each account has been computed correctly, and 7c8 the addition of account balances in the trial balance has been done accurately. F Accounts appear in the trial balance in the order in which they appear in the ledger, which is in financial statement order 7assets, followed by liabilities, owners% e1uity, revenue, and e/penses8. T An entry which includes more than one debit or more than one credit is called a compound journal entry. T $very transaction is to be recorded by an e1ual dollar amount of debits and credits) recording a transaction properly will maintain e1uality of debits and credits. T ?ince both debit and credit of the original journal entry were e1ual, the trial balance would still show e1uality of debits and credits. F The premise of double4entry accounting means that e1ual dollar amounts of debits and credits are used to record each business transaction. T <et income cannot be evaluated unless it is associated with a specific time period. F The reali!ation principle states that revenue should be recogni!ed when services are rendered or goods are delivered. T $/penses offset revenue in determining net income and therefore reduce owners% e1uity. F <et income e1uals revenue minus e/penses) cash receipts and revenue are not the same. T To record an e/pense, the e/pense account is debited and cash or a liability is credited) to record revenue, the asset received is debited and revenue is credited. F 2evenue is recogni!ed when earned) e/penses are recogni!ed in the period in which the cost helps to produce revenue. T The cash payment for an e/pense may occur before, after, or in the same period that an e/pense helps to produce revenue. F A portion of the cost of the building will be recogni!ed as depreciation e/pense each period over the building%s useful life. T 2evenue is the gross increase in owners% e1uity resulting from business activities) all increases in owners% e1uity are recorded by credits.

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Completion Statements 1. >ebits, credits, debits. 2. :eft, ledger account, right. 3. :eft, debit, right, credit. #. =ash, <otes 9ayable, debit, credit. (. Trial balance, debit balances, credit balances. *. 2eali!ation, matching, revenue. +. producing revenue. Multiple Choice 1. Answer c J a separate ledger account is maintained to record the changes in each asset, liability, and element of owners0 e1uity. Answers a4 %, and - all relate to the journal, which consists of a chronological record of business transactions. Answer - is false. Fwners0 e1uity accounts appear on the right4hand side of the balance sheet and are increase by credit entries. Answer a J double4entry accounting means that e1ual dollar amounts of debits and credits are needed to record any business transaction. Answer c describes a journal. Answer a describes a trial balance) answer %, a database) and answer -, a ledger. Answer c J a trial balance is a listing of the balances of the accounts in the ledger. Answers a and % are incorrect because they relate to data not yet posted into the ledger. Answer - is incorrect because it is the total dollar amount of debit and credit balances that must be e1ual, not the number of accounts with each type of balance. Answer c J a decrease in one asset account must be accompanied by an increase in another asset account, or by a decrease in either a liability or an owners0 e1uity account. Answer % J for accounting information to be useful, it must be available on a fre1uent periodic basis. This re1uires dividing the overall life of the business entity into e1ual &accounting periods.' Answer a is incorrect because the principle does not re1uire monthly statements. Answer c is incorrect because a company%s fiscal year need not end on >ecember 31. Answer - is incorrect because generally accepted accounting principles are not governed by income ta/ laws. Answer a J under the reali!ation principles revenue is recogni!ed when it is earned regardless of when the cash is collected. Answers % and c are incorrect because they tie the recognition of revenue to the collection of cash. Answer - describes the matching principle, not the reali!ation principle. Answer % J the reali!ation principle indicates that revenue should be recogni!ed when it is earned J that is, when services are rendered or when goods sold are delivered to customers. Answer c J e/penses should be offset against the revenue produced by these e/penditures. Answers a and - are incorrect because the period in which e/penses are recogni!ed may differ from the period in which the related cash payments are made. Answer % is incorrect because e/penses may differ from revenue by the amount of any net income or net loss. Answer c J A*,133 H A#,*33. Answer a e/cludes the A#,*33 in salaries e/pense for April. Answer % e/cludes the salaries and improperly includes A+33 in advertising e/pense for the month of Garch. Answer - improperly includes the A+33 in advertising e/pense applicable to Garch. Answer - J the debit entry to record an e/pense is always accompanied by either a credit 7decrease8 in an asset account, or a credit 7increase8 in a liability account.

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Solutions to E ercises 1. a. b. c. d. e. f. g. Accounting =ycle 2evenue <et income Trial "alance <one 7The statement describes the matching principle.8 =redit Accrual accounting 2. !ournal Entr" a. =ash ............................................... Accounts 2eceivable E**ect o* transaction b. =ash ............................................... =apital ?toc;.......................... E**ect o* transaction c. =ash ............................................... <otes 9ayable........................ E**ect o* transaction d. Accounts 9ayable............................ =ash....................................... E**ect o* transaction e. :and ............................................... =ash....................................... <otes 9ayable........................ E**ect o* transaction #r 1,233 Cr 1,233 (,333 (,333 3,-33 3,-33 H3,-33 3(3 3(3 .,333 1,333 -,333 43(3 43(3 H.,333 41,333 H-,333 I I H(,333 H3,-33 I 3 H3,-33 H3,-33 43(3 43(3 H Assets H1,233 41,233 3 H(,333 $ I Lia%ilities 3 & H O'ners( E)uit" 3 H(,333 H(,333

H-,333 H-,333

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Transactions a % c e *

Accounts+s, #e%ite22 1 (1 1,2 3 ..

Accounts+s, Cre-ite1 2 22 #1 21 1

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Error a % c e * Total Re/enue NE ( ( NE NE NE

Income Statement
Total E penses ' NE NE NE ( NE Net Income ( ( ( NE ' NE Total Assets ( ( ( ( ' (

.alance Sheet
Total Lia%ilities NE NE NE ( N ( O'ners( E)uit" ( ( ( NE ' NE

GLOSSARY
accrual basis of accou !i ": Transactions are recorded when they occur regardless of when cash is paid or received. Commissions use a modified form of accrual accounting (see Modified Accrual Basis) for Governmental funds. However the accrual !asis of accounting is used for the preparation of annual government"wide financial statements where governmental activities are reported (governmental activities are defined later). ac!i#$ i #$s!%$ ! %a a"$%$ !: Active management of an investment portfolio implies that the investing official may sell some securities in order to shift assets into other instruments. This may !e done simply to re!alance a portfolio that has !ecome overconcentrated in one sector or it may reflect an effort to enhance total returns !y trading or swapping into securities that are e#pected to outperform the original holding. Active investment management re$uires e#pertise and fre$uent monitoring of financial mar%ets. a&%i is!ra!i#$ cos!s: Costs incurred for a common or &oint purpose that !enefits more than one cost o!&ective supports the general management and administration of a 'irst ( commission and)or those costs not readily assigna!le to a specifically !enefited cost o!&ective. a&#a c$ 'a(%$ !: Any payment made to a contractor !efore wor% has !een performed or goods have !een delivered. a''ro'ria!io : Appropriations represent the ma#imum e#penditures that are authori*ed !y the governing !ody of the commission. They represent (!y !udget category) amounts that cannot !e legally e#ceeded. +nternal reporting must provide timely information so the Board of the commission can determine that the spending limits authori*ed have not !een e#ceeded. assi" $& fu & bala c$: That portion of the fund !alance that reflects a commission,s intended use of resources which is esta!lished either !y the county 'irst ( Commission a !ody created !y the commission such as a commission finance committee or an official designated !y the commission (e.g. an -#ecutive .irector). bala c$ s)$$!: The financial statement disclosing the assets lia!ilities and e$uity of the governmental funds (which includes general funds and special revenue funds). Governments are also re$uired to disclose assets lia!ilities and e$uity on a /government"wide entity0 !asis using accrual accounting. This is %nown as the 1tatement of 2et Assets. ba *$rs+ acc$'!a c$: A time draft drawn on and accepted !y a !an% to pay a specified amount of money on a specified date. Ban%ers3 acceptances are short"term non"interest !earing notes sold at a discount and redeemed at maturity at face value !y the accepting !an%. Ban%ers3 acceptances are !ac%ed !y the issuers3 guarantee to pay the underlying goods !eing financed and the guarantee of the accepting !an%. bi&&$r+s co f$r$ c$: A meeting with potential providers !efore the proposal su!mission date. bro*$r: A person or firm that acts as an intermediary !y purchasing and selling securities for others rather than for its own account. bu&"$!ar( basis of accou !i ": The form of accounting used to descri!e revenues and e#penditures in the !udget document. The term 4!asis of accounting4 is used to descri!e the timing of recognition that is when the effects of transactions or events should !e recogni*ed. The !asis of accounting used for purposes of financial reporting in

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accordance with generally accepted accounting principles (GAA5) is not necessarily the same !asis used in preparing the !udget document. 'or e#ample governmental funds are re$uired to use the modified accrual !asis of accounting in GAA5 financial statements whereas the cash !asis of accounting or the 4cash plus encum!rances4 !asis of accounting may !e used in those same funds for !udgetary purposes. .isparities !etween GAA5 and the !udgetary !asis of accounting often occur !ecause of regulations that govern !udgeting (e.g. laws or ordinances of the state county city or some other &urisdiction) which differ from GAA5. There are four !asic categories of difference !etween the !udgetary !asis of accounting and the !asis of accounting that follows generally accepted accounting principles (GAA5) for state and local governments. They are6

basis of accounting 7 4cash plus encum!rances4 and 4modified accrual4 are two of the different ways to define revenues and e#penditures8 timing 7 the !udget period may differ from the accounting reporting period e.g. lapse periods for encum!rances8 perspective 7 the !udget and accounting reports may have different fund reporting structures e.g. a !udget may account for de!t service in the general fund while GAA5 principles re$uire that de!t service !e recorded in a separate fund8 entity 7 the government3s financial report may not include all of the same entities and funds as the !udget document.

ca'i!al ass$!s: 9and improvements to land easements !uildings !uilding improvements vehicles machinery e$uipment wor%s of art and historical treasures infrastructure and all other tangi!le or intangi!le assets that are used in operations and that have initial useful lives e#tending !eyond a single reporting period. Capital assets historically were also referred to as fi#ed assets !ut that terminology is no longer used in practice. cas) basis of accou !i ": Basis of accounting that recogni*es transactions or events when related cash amounts are received or dis!ursed. c$r!ifica!$ of &$'osi!: A time deposit in a financial institution documented !y a certificate that !ears a specified dollar amount of the deposit a specified maturity date and a specified interest rate. colla!$ral: :nderlying securities that are pledged to secure deposits of pu!lic funds. Also used in con&unction with repurchase agreements to protect the entity from default !y the counter party. colla!$rali,a!io : The process !y which a !orrower pledges securities property or other deposits for the purpose of securing the repayment of a loan and)or security. CAFR -co%'r$)$ si#$ a ual fi a cial r$'or!: An annual financial report that conforms to the re$uirements of the Governmental Accounting 1tandards Board. co%%$rcial 'a'$r: An unsecured short"term promissory note issued !y corporations with maturities ranging from ; to ;<= days. co%%i!!$& fu & bala c$: That portion of fund !alance that includes funds whose use is contrained !y limits imposed !y the government,s highest level of decision ma%ing (for 'irst ( county organi*ations the County 'irst ( Commission) and for which the removal or modification of use of funds can !e acomplished only !y formal action of the same level of decision ma%ing that esta!lished the constraints. co !rac!: A legally !inding agreement !etween two parties for the provision of goods or services. cou !( 'ool$& i #$s!%$ ! fu &s: The aggregate of all funds from pu!lic agencies placed in the custody of the county treasurer or chief finance officer for investment and reinvestment. cou'o : The annual rate of interest that a !ond3s issuer promises to pay the !ondholder on the !ond3s face value8 a certificate attached to a !ond evidencing interest due on a payment date. cr$&i! .uali!(: The measurement of the financial strength of a !ond issuer. This measurement helps an investor to understand an issuer3s a!ility to ma%e timely interest payments and repay the loan principal upon maturity. Generally the higher the credit $uality of a !ond issuer the lower the interest rate paid !y the issuer !ecause the ris% of default is lower. Credit $uality ratings are provided !y nationally recogni*ed rating agencies.

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cus!o&ia : A !an% or other financial institution that %eeps custody of stoc% certificates and other assets. &$al$r: 1omeone who acts as a principal in all transactions including underwriting !uying and selling securities including from his)her own account. &$ri#a!i#$: 1ecurities that are !ased on or derived from some underlying asset reference date or inde#. &isburs$%$ !s: The payment of cash for e#penditures. 1uch payments may precede the e#penditures (an advance) coincide with the e#penditures (a direct payment) or follow the e#penditures (the payment of a lia!ility). &iscou ! s$curi!i$s: 1ecurities that pay no interest. They are issued at a discount from their face value. An investor,s return on investment is the difference !etween the discounted purchase price and the maturity (or sale) price. :.1. Treasury !ills are an e#ample of a discount security. $ cu%bra c$s: Contractual o!ligations to ma%e future payments. -ncum!rances represent the estimated amount of future e#penditures that will result when for e#ample purchase orders are placed and contracts are signed. 1ince the amount of an appropriation cannot !e legally e#ceeded the placing of purchase orders and the signing of contracts are critical events in controlling the commissions3 funds. The financial resources of a fund are said to !e encum!ered when a transaction is e#ecuted that re$uires performance on the part of another party !efore the commission !ecomes lia!le to perform its part of the transaction (ma%e payment to the entity). Consistent with the enactment of GA1B 1tatement (> encum!rances are no longer reported separately in the financial statements. 'or governments that use encum!rance accounting significant encum!rances should !e disclosed in the notes to the financial statements !y ma&or funds and non"ma&or funds in the aggregate in con&unction with re$uired disclosures a!out other significant commitments. $#alua!io cos!s: Costs incurred !y 'irst ( commissions in the evaluation of funded programs in accordance with their accounta!ility framewor% and data collection and evaluation for re$uired reporting to state and local sta%eholders. $/'$ &i!ur$s: Ta%e place when a vendor or contractor performs on a contract or a purchase order as well as when goods or services are received. An e#penditure and a corresponding lia!ility or cash dis!ursement will !e recorded at the time goods or services are received or at the time funds are granted to an authori*ed recipient. fi&uciar( fu &s: 'unds used to report assets held in a trustee or agency capacity for others and which therefore cannot !e used to support the government,s own programs. The fiduciary fund category includes pension (and other employee !enefit) trust funds investment trust funds private"purpose trust funds and agency funds. fu & bala c$: The value of the funds availa!le to the commission. 'und !alance is the difference !etween fund assets and fund lia!ilities of governmental funds. GAAP: A!!reviation for 4generally accepted accounting principles 4 which are conventions rules and procedures that serve as the norm for the fair presentation of financial statements. The Governmental Accounting 1tandards Board (GA1B) is responsi!le for setting GAA5 for state and local governments. Go#$r %$ !al Accou !i " S!a &ar&s 0oar& -GAS01: :ltimate authoritative accounting and financial reporting standard"setting !ody for state and local governments. The GA1B was esta!lished in ?une @AB>. "o#$r %$ !al ac!i#i!i$s: Governmental activities are !asically all of the governmental funds reported together on an accrual !asis. Also governmental activities include all related capital assets and long"term lia!ilities and are reported at the government"wide level of reporting. "o#$r %$ !al fu &s:'unds generally used to account for ta#"supported activities. There are five different types of governmental funds6 the general fund special revenue funds de!t service funds capital pro&ects funds and permanent funds. "uara !$$& i #$s!%$ ! co !rac!s -GICs1: An agreement ac%nowledging receipt of funds for deposit specifying terms for withdrawal and guaranteeing a rate of interest to !e paid. i !$r$s!2o l( s!ri's: The interest cash flow portion of a stripped mortgage"!ac%ed security or !ond. The holder receives no principal payments. A significant loss in value can occur on interest only strips created from mortgage" !ac%ed securities when the underlying mortgage prepayments accelerate typically in a falling interest"rate environment.

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i !$r al co !rol -fra%$3or*1: +ntegrated set of policies and procedures designed to assist management to achieve its goals and o!&ectives. To !e comprehensive the framewor% must6 @) prove a favora!le control environment ;) provide for the continuing assessment of ris% C) provide for the design implementation and maintenance of effective control"related policies and procedures >) provide for the effective communication of information and () provide for the ongoing monitoring of the effectiveness of control"related policies and procedures as well as the resolution of potential pro!lems identified !y controls. i #$rs$ floa!$rs: A security that reacts inversely to the direction of interest rates. These securities can !e very volatile and can lose value in a rising interest"rate environment. li.ui&i!(: The a!ility to convert securities into cash on a short notice. 9i$uidity incorporates a security holder3s a!ility to sell an instrument without significant loss as well as other factors that might e#pedite $uic% e#change for cash. An e#ample of an illi$uid asset would !e a nonnegotia!le !an% certificate of deposit for which the holder must pay an interest penalty for premature redemption. local a"$ c( i #$s!%$ ! fu &: A voluntary investment fund open to government entities and certain non"profit organi*ations in California that is managed !y the 1tate Treasurer3s Dffice. local a"$ c( i #$s!%$ ! fu & -LAIF1: A voluntary investment fund open to government entities and certain non" profit organi*ations in California that is managed !y the 1tate Treasurer,s Dffice. local a"$ c( i #$s!%$ ! fu &: A voluntary investment fund open to government entities and certain non"profit organi*ations in California that is managed !y the 1tate Treasurer3s Dffice. local "o#$r %$ ! i #$s!%$ ! 'ool -LGIP1: +nvestment pools that range from the 1tate Treasurer,s Dffice 9ocal Agency +nvestment 'und (9A+') to county pools to ?oint 5owers Authorities (?5As). These funds are not su!&ect to the same 1-C rules applica!le to money mar%et mutual funds. lo "2!$r% fi a cial 'la : A plan that assesses the long"term financial implications of current and proposed policies programs and assumptions and develops appropriate strategies to achieve its goals. A financial plan illustrates the li%ely financial outcomes of particular courses of action or factors affecting the environment in which the government operates. A financial plan is not a forecast of what is certain to happen !ut rather a device to highlight significant issues or pro!lems that must !e addressed if goals are to !e achieved. %ar*$! #alu$: The price at which a security is trading and presuma!ly could !e purchased or sold at a particular point in time. %a!$rial: Materiality in auditing and accounting relates to the importance of an amount transaction or discrepancy. +t usually depends on the si*e of the item or error &udged in the particular circumstances of its omission or misstatement. +n government materiality has !oth a $uantitative and a $ualitative aspect where materiality often concerns the nature rather than the si*e of an amount such as illegal acts !ri!ery corruption and related party transactions. Because of the importance of transparency in the pu!lic sector commissions should discuss with and understand the level of materiality that will !e chosen !y the auditors of their financial statements. %a!uri!(: The date on which the principal or stated value of an investment !ecomes due and paya!le. %$&iu%2!$r% o!$: Corporate or depository institution de!t securities that meets certain minimum $uality standards (as specified in the California Government Code) with a remaining maturity of five years or less. %o&ifi$& accrual basis of accou !i ": The !asis of accounting adapted to government fund accounting where revenues are recogni*ed when received in cash or when resources are considered availa!le (e#cept for material or availa!le revenues which should !e accrued to reflect properly the ta#es levied and the revenues earned 7 not applica!le to county commissions). -#penditures are recogni*ed when the related fund lia!ility is incurred. %ul!i2($ar bu&"$!i ": A multi"year !udget is a document that authori*es a government3s appropriations (i.e. planned e#penditures) and anticipated revenues for two or more consecutive !udgetary years. A multi"year !udget also may consist of a !iennial !udget with one or two financial plans that serve as the tentative spending plans for the out"years (i.e. the first year appropriations are formally adopted whereas the su!se$uent year /appropriations0 are not). %u!ual fu &s: An investment company that pools money and can invest in a variety of securities including fi#ed" income securities and money mar%et instruments.

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Na!io al A&#isor( Cou cil o S!a!$ a & Local 0u&"$!i " -NACSL01: A cooperative effort of eight state and local government associations to improve governmental !udgeting. To this end the 2AC19B developed a comprehensive set of (A recommended !udgeting practices. These practices address all steps of the !udgeting process including6 the analysis and goal setting that occurs !efore the written !udget document is produced the items that should !e included in the !udget document and the monitoring and evaluation that occurs after the document is adopted. The recommended practices are availa!le on the Ee!. o s'$ &abl$ fu & bala c$: Amounts in fund !alance that cannot !e spent !ecause they are either not in spenda!le form (e.g. prepaid items and inventories) or legally)contractually re$uired to !e maintained intact (e.g. the reinvested principal provided !y an endowment). o!$: A written promise to pay a specified amount to a certain entity on demand or on a specified date. ob4$c! of $/'$ &i!ur$: +n the conte#t of the classification of e#penditures the article purchased or the service o!tained rather than the purpose for which the article or service was purchased or o!tained (e.g. personal services contractual services materials and supplies). ou!co%$: The end result that is sought. A service may have more than one outcome. 'ar: 'ace value or principal value of a !ond typically F@ === per !ond. 'assi#$ i #$s!%$ ! %a a"$%$ !: An investment strategy in which securities are !ought with the intention of holding them to maturity or investing in !enchmar% products designed to yield a mar%et rate of return. '$rfor%a c$ co !rac!: A type of contract that specifies the end results desired rather than the specific details of how a product should !e manufactured or how a service should !e delivered. '$rfor%a c$ %$asur$: A particular value or characteristic designated to measure input output outcome efficiency or effectiveness. 'or!folio: Com!ined holding of more than one stoc% !ond commodity real estate investment cash e$uivalent or other asset. The purpose of a portfolio is to reduce ris% !y diversification. 'ri ci'al: The face value or par value of a de!t instrument or the amount of capital invested in a given security. 'ro"ra% cos!s: Costs incurred !y local 'irst ( commissions readily assigna!le to a program grantee contractee or service provider (other than post"contract program evaluation activities) and)or in the e#ecution of direct service provision. 'ro"r$ss 'a(%$ !s: 5artial payments related to steps or phases toward the completion of the re$uired services under a contract. 'ro"r$ss r$'or!: A report on contract performance or fiscal compliance made at specific intervals during the term of a contract. 'ro'osal r$#i$3 co%%i!!$$: A committee or panel that convenes to evaluate the $ualifications of !idders who respond to a re$uest for proposals (G'5). 'ro'ri$!ar( fu &s:'unds that focus on the determination of operating income changes in net assets (or cost recovery) financial position and cash flows. There are two different types of proprietary funds6 enterprise funds and internal service funds. 'ru&$ ! i #$s!or s!a &ar&: A statement often included in laws and investment policies that specifies the responsi!ility of government officials in their investment decisions with pu!lic funds. The prudent investor standard holds the investor to a higher standard of care than the average prudent person. The prudent investor standard states6 /These persons shall act with care s%ill prudence and diligence under the circumstances then prevailing when investing reinvesting purchasing ac$uiring e#changing selling and managing funds.0 The /prudent e#pert rule0 holds an investor to an even higher standard and is often cited in contracts with investment advisors. 'ru&$ ! '$rso rul$: A statement often included in laws and investment policies that specifies the responsi!ility of government officials in their investment decisions with pu!lic funds. The prudent person rule states6 /+nvestments shall !e made with &udgment and care under circumstances then prevailing which persons of prudence discretion

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and intelligence e#ercise in the management of their own affairs not for speculation !ut for investment considering the pro!a!le safety of their capital as well as the pro!a!le income to !e derived.0 r$'urc)as$ a"r$$%$ !s: An agreement of one party (for e#ample a financial institution) to sell securities to a second party (such as a local agency) and simultaneous agreement !y the first party to repurchase the securities at a specified price from the second party on demand or at a specified date. r$.u$s! for i for%a!io -RFI1: The document used to o!tain information from potential providers !efore a solicitation document (G'5) is issued. r$.u$s! for 'ro'osals -RFP1: The solicitation document that is most appropriate in those situations in which it is necessary and appropriate to evaluate !idders on the !asis of their $ualifications as well as their price. The G'5 descri!es the $ualification re$uirements performance specifications time frames and other re$uirements and as%s !idders to descri!e how they would accomplish the services and at what price. r$.u$s! for .ualifica!io s -RF51: An G'H is used when a commission has specific re$uirements as to how services are to !e delivered. +n an G'H the applicant demonstrates their $ualifications to provide those services according to the model that the commission has specified. +n addition the commission as%s applicants to demonstrate their %nowledge of and commitment to the specified model. r$s!ric!$& fu & bala c$: Amounts in fund !alance that have constraints imposed e#ternally from creditors grantors contri!utors laws or regulations of other governments or imposed constitutionally !y ena!ling legislation. r$!ur o i #$s!%$ !: +nvestors will face a multitude of securities and other instruments with varying $uoted interest rates coupons prices yields and other num!ers. The amount of income received from an investment e#pressed as a percentage of its price is the rate of return. A mar%et rate of return is the yield that an investor can e#pect to receive in the current interest rate environment utili*ing a !uy"and"hold investment strategy. Total return is interest income plus capital gains (or minus losses) on an investment and is the most important measure of performance as it is the actual return on investment during a specific time interval. Many investors consider the holding period (from purchase until maturity or sale) the easiest interval to measure the return on investment. Dthers measure the investment return on a security or portfolio according to various time intervals (monthly $uarterly or annually). r$#$rs$ r$'urc)as$ a"r$$%$ !s: An agreement of one party (for e#ample a financial institution) to purchase securities at a specified price from a second party (such as a pu!lic agency) and a simultaneous agreement !y the first party to resell the securities at a specified price to the second party on demand or at a specified date. ris*2bas$& %o i!ori ": An approach to contract monitoring in which reporting re$uirements are !ased on a given provider3s ris% profile. Rul$ G236 of !)$ Mu ici'al S$curi!i$s Rul$%a*i " 0oar&: 'ederal regulations to sever any connection !etween the ma%ing of political contri!utions and the awarding of municipal securities !usiness. saf$*$$'i ": A procedure where securities are held !y a third party acting as custodian for a fee. S$curi!i$s a & E/c)a "$ Co%%issio -SEC1: The federal agency responsi!le for supervising and regulating the securities industry. s$curi!i$s l$ &i " a"r$$%$ !: An agreement of one party (for e#ample a local agency) to !orrow securities at a specified price from a second party (for e#ample another local agency) with a simultaneous agreement !y the first party to return the security at a specified price to the second party on demand or at a specified date. These agreements generally are collaterali*ed and involve a third"party custodian to hold the securities and collateral. -conomically similar to reverse repurchase agreement. sol$ sourc$ 'rocur$%$ !: A noncompetitive procurement in which only a single provider is afforded the opportunity to offer a price for desired goods or services. s$co &ar( %ar*$!: The mar%et where securities are sold after their initial issuance. s!a*$)ol&$r: The term 4sta%eholder4 refers to anyone affected !y or who has a sta%e in government. This term includes !ut is not limited to6 citi*ens customers elected officials management employees and their representatives (whether unions or other agents) !usinesses other governments and the media.

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s!a!$%$ ! of ac!i#i!i$s: A government"wide presentation of its activities !y function or program using the accrual !asis of accounting. The statement presents revenues e#penditures and a reconciliation of net assets. s!a!$%$ ! of $! ass$!s: The government"wide presentation of assets lia!ilities and e$uity of governmental activities which includes all funds. +t is the government"wide !alance sheet. The 1tatement of 2et Assets is presented on an accrual !asis. s!a!$%$ ! of r$#$ u$s7 $/'$ &i!ur$s7 a & c)a "$s i fu & bala c$s: The governmental fund presentation of the revenues e#penditures and other finance sources and uses of funds. This statement is presented on a modified accrual !asis. s!a!$%$ ! of 3or*: A definition of the services to !e delivered and)or the outcomes to !e achieved. su''la !a!io : Dccurs when new funds are used to fund e#isting programs. 2o funds provided !y the commission should !e used to supplant state or local general fund money for any purpose. +n general terms the word supplant means to ta%e the place of or ta%e the place of something else. !rus!$$7 !rus! co%'a (7 or !rus! &$'ar!%$ ! of a ba *: A financial institution with powers to act in a fiduciary capacity for the !enefit of the !ondholders in enforcing the terms of the !ond contract. U8S8 Tr$asur( obli"a!io s: .e!t o!ligations of the :.1. government sold !y the Treasury .epartment in the forms of !ills notes and !onds. Bills are short"term o!ligations that mature in one year or less and are sold at a discount. 2otes are o!ligations that mature !etween one year and @= years. Bonds are long"term o!ligations that generally mature in @= years or more. u assi" $& fu & bala c$: That portion of the fund !alance portion that does not meet the re$uirements of the other classifications (assigned committed nonspenda!le restricted). 3$i")!$& a#$ra"$ %a!uri!( -9AM1: The average maturity of all the securities that comprise a portfolio typically e#pressed in days or years. (i$l&: The percentage return on an investment8 also called /return.0 There are several yield calculations that can !e made such as /yield to maturity0 and /yield to call.0 Iield to maturity is the promised return assuming all interest and principal payments are made and reinvested at the same rate ta%ing into account price appreciation (if priced !elow par) or depreciation (if priced a!ove par). Iield to call is the yield an investor will receive if the security is called prior to maturity. (i$l& cur#$: A graphic representation that shows the relationship at a given point in time !etween yields and maturity for !onds that are identical in every way e#cept maturity. ,$ro2i !$r$s! accrual: Jero interest accrual means the security has the potential to reali*e *ero interest depending upon the structure of the security. Jero coupon !onds and similar investments that start at a level !elow the face value are legal !ecause their value does increase.

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