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Accounting 121
Chapter 4 & 5
| Term | Definition |
|---|---|
| merchandise | goods that a company owns and expects to sell to customers; also called merchandise inventory or inventory |
| merchandiser | entity that earns income by buying and selling merchandise |
| wholesaler | intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers |
| retailer | intermediary that buys products from manufacturers or wholesalers and sells them to customers |
| net income (for merchandiser) | equals revenues from selling merchandise minus both the cost of merchandise sold and other expenses |
| sales | revenues from selling merchandise |
| cost of goods sold | cost of inventory sold to customer during a period; also called cost of sales; normal debit balance account, increase a Dr., thus decrease a Cr., expense, IS |
| net income (for merchandiser) (equation) | net sales - cost of goods sold = gross profit - operation expenses = net income |
| gross profit | net sales minus cost of goods sold; also called gross margin |
| gross margin | net sales minus cost of goods sold; also called gross profit |
| merchandise inventory | goods that a company owns and expects to sell to customers; also called merchandise or inventory; normal debit balance account, increase a Dr. account, thus decrease a Cr., asset, BS |
| inventory | goods a company owns and expects to produce and/or sell in it normal operations |
| operating cycle for a merchandiser | (a) cash purchases of merchandise to (b) inventory for sale to (c) credit sales to (d) accounts receivable to (e) receipt of cash |
| merchandise available for sale | MAS |
| MAS (equation) (beginning inventory) | BI + NP = MAS |
| beginning inventory | BI |
| net purchases | NP |
| cost of goods sold | COGS |
| ending inventory | EI |
| MAS (equation) (ending inventory) | MAS = EI + COGS or MAS - EI = COGS, or MAS - COGS = EI |
| two inventory systems | perpetual system and periodic system |
| perpetual inventory system | method that maintains continuous records of the cost of inventory available and the cost of goods sold; at each purchase and each sale of inventory |
| periodic inventory system | method that records the costs of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available |
| hybrid inventory system | the perpetual system is used for tracking units available and the periodic system is used to compute cost of sales |
| inventory (equation) | BI + purchases = MAS - EI = CGS |
| inventorial costs | costs recorded in merchandise inventory |
| list price | catalog (full) price of an item before any trade discount is deduced |
| selling price | equals list price minus percent called a trade discount |
| trade discount | reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers; not journalized; purchases are recorded based on invoice amount |
| credit terms | description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future; apply to both partial and full payments |
| EOM | abbreviation for end of month; used to describe credit terms for credit transactions |
| "n/10 EOM" | credit terms for sellers requiring payment within 10 days after the end of month |
| "n/30" | net 30 days |
| credit period | time period that can pass before a customer's payment is due |
| cash discount | reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period |
| purchases discount | term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period |
| sales discount | terms used by a seller to describe a cash granted to buyers who pay within the discount period |
| "2/10, n/30" | credit term for sales/purchase discount when full payment is due within 30-day credit period, but the buyer can deduct 2% of the invoice amount if payment is made within 10 day of the invoice date |
| discount period | time period in which a cash discount is available and the buyer can make a reduced payment |
| gross method | method of recording purchases at the full invoice price w/o deducting any cash discounts (1) used more in practice (2) easier to apply (3) less costly |
| purchases returns | merchandise a buyer purchases but then returns |
| purchases allowances | refer to a seller granting a price reduction (allowance) to a buyer of defective or unacceptable merchandise |
| debit memorandum | notification that the issuer (sender) has debited the recipient account in the sender's records |
| trade discounts | used by manufacturers and wholesalers to offer better prices for greater quantities purchased |
| n | abbreviation for net (or all) |
| FOB | abbreviation for free on board; the point when ownership of goods passes to the buyer |
| FOB shipping point (or factory) | means the buyer shipping costs and accepts ownership of goods when the seller transfers to the carrier |
| FOB destination | means the seller pays the shipping costs and the buyer accepts ownership of the goods of the buyer's place of business |
| transportation-in/freight-in | a buyer is responsible for paying transportation costs payment made to carrier directly to the seller, when the cost principle requires that the transportation cost of a buyer be part of the cost of merchandise inventory |
| transportation/freight-out | a seller is responsible for paying shipping costs, it records these costs in a delivery expense account; reported as a selling expense in the sellers income statement |
| supplementary records | information outside the usual accounting records; also called supplemental records; refer to information outside the usual ledger accounts |
| gross method (sales) | records sales at the full amount and records sales discounts; if and when, they are taken; requires a period end adjusting entry to estimate future sales discount |
| net method | method of recording purchases at the full invoice price less any cash discounts |
| sales discounts | contra revenue account; subtracted from the sales account when computing net sales, which has a normal debit balance; thus increase Dr. and decrease a Cr., expense, IS |
| contra revenue account | have normal debit balance, thus increases a Dr. and decrease a Cr., IS. |
| sales return | customer dissatisfied with a purchase, returns the merchandise for a full refund |
| sales allowance | customer dissatisfied with a purchase, keep the merchandise with a partial refund |
| sales returns and allowances (part 1) | refunds or credits given to customers for unsatisfactory merchandise are recorded (debited) in sales returns and allowances, a contra revenue account to sales |
| sales returns and allowances (part 2) | in addition, estimates of future sales returns and allowances (relate to current - period sales) are made with an adjusting entry that debits sales returns and allowances |
| sales returns and allowances (part 3) | this results in sales being recorded net of expected returns and allowances; sales returns and allowances; sales returns and allowances is a temporary account that is closed each period; |
| credit memorandum | notification that the issuer (sender) has credited the recipient account in the sender's records |
| shrinkage | inventory losses that occur as a result of theft or deterioration |
| temporary accounts (merchandisers) (part 1) | sales of goods (revenue) (credit balance) to income summary; sales discounts (contra revenue) (debit balance) to income summary; |
| temporary accounts (merchandisers) (part 2) | sales returns and allowances (contra revenue) (debit balance) to income summary; cost of goods sold (expense) (debit balance) to income summary |
| two income statement format | multiple step & single step |
| multiple step income statement | income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses |
| selling expenses | the expenses of advertising merchandise, making sales, and sales, and delivering goods to customers |
| general and administrative expenses | support a company's overall operations and include expenses related to accounting, human resources, and finances |
| nonoperating activities | consist of other expenses, revenues, losses, and gains that are unrelated to a company's operations |
| other revenues and gains | commonly include interest revenue, dividend revenue, rent revenue, and gains from asset disposals |
| other expenses and losses | commonly include interest expense, losses from asset disposals, and casualty losses |
| net income | no reportable nonoperating activities, its income from operations |
| single-step income statement | income statement format that subtracts total expenses, including cost of goods sold, from total revenues with no other subtotals |
| classified balance sheet (merchandiser) | the classified balance sheet reports merchandise inventory as a current asset, usually after accounts receivable, according to how quickly they can be converted to cash |
| acid-test ratio | a measure of a merchandiser's ability to pay current liabilities (referred to as it liquidity; also called quick ratio, is defined as quick assets (cash, short-term investments, and current receivables divided by current liabilities |
| acid-test ratio (part 2) | it differs from current ratio by excluding less liquid current assets such as inventory and prepaid assets that take longer to be converted to cash |
| acid-test ratio (equation) | cash and cash equivalents + short terms investments + current receivables / current liabilities |
| gross margin ratio (gross profit ratio) | defined as gross margin (net sales minus cost of goods sold) divided by net sales; differs from the profit margin ratio that it excludes all costs except cost of goods sold |
| gross margin ratio (equation) | net sales - cost of goods sold / net sales |
| purchases account | periodic system, temporary account that accumulates the cost of all purchase transactions during each period; has a normal balance, thus increases a Dr., and decreases a Cr., BS |
| purchases discounts | periodic system, temporary account that accumulates discounts taken during the period; contra purchase (expense) account; normal credit balance; thus increase a Cr.; and decrease a Dr.; BS; decrease cost of merchandise available for sale |
| purchases returns and allowances | temporary account accumulates the cost of all returns and allowances; contra purchase (expense) account; normal credit balance, thus increase a Cr., decrease a Dr.; BS; decrease cost of merchandise available for sale |
| transportation-in | cost is recorded in a temporary account; normal debit balance account; thus increasing a Dr., decrease a Cr.; BS; increases merchandise available for sale |
| sales returns and allowances (account type) | have a normal debit balance, thus increases a Dr., and decreases a Cr., (contra revenue) expense, IS |
| consignor | owner of goods held by another party who will sell them for the owner. |
| consignee | receiver of goods owned by another who holds them for purposes of selling them for the owner. |
| net realizable value | expected selling price (value) of an item minus the cost of making the sale |
| four methods of inventory systems | specific identification; first-in, first out (FIFO); Last-in, first out (LIFO) and weighted average |
| First-in, first out (FIFO) | method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold |
| Last in, first out (LIFO) | method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. |
| weighted average (WA) (average cost) | method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale, which is then multiplied by the units sold to yield the cost of that sale |
| specific identification | method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory |
| weighted average (equation) | cost of goods available for sale (at each sale) / number of units available for sale (at each sale) |
| lower of cost or market | LCM: required method to report inventory at market replacement cost when that market cost is lower than recorded cost |
| inventory turnover | number of times a company's average inventory is sold during a period; computed by dividing cost of goods sold by average inventory, also called merchandise turnover |
| inventory turnover (equation) | inventory turnover = cost of goods sold / average inventory |
| days' sales in inventory | estimate of number of days needed to convert inventory into into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365, also called days stock on hand |
| days' sales in inventory (equation) | day's sale in inventory = ending inventory / cost of goods sold x 365 |
| consistency principle | requires a company to use the same accounting methods period after period so that financial statements are comparable across periods |
| retail inventory method | method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail |
| gross profit method | procedure to estimate inventory by using the past gross profit rate to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale |
| average inventory | beginning inventory + ending inventory / 2 |
Created by:
ryanriggs18
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