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Flashcards in Chapter 5 Deck (50):
1

Retailers

Merchandising companies that purchase and sell dierectly to consumers

2

Wholesalers

Merchandising companies that sell to retaliers

3

Cost of goods sold

Total cost of merchandise sold during the period

4

Gross profit

Sales revenue - Costs of goods sold

5

Net income

Gross profit  - operating expenses

6

Perpetual inventory system

An inventory system in which a company maintains the cost of each inventory item and records continuously show the inventory that should be on hand

7

Periodic inventory system

An invnentory system when a company does not maintain detalied records of goods on hand and determines the cost of goods sold only at the end of an accounting period

8

Helpful hint: perpetual inv.

Under perpetual inventory systems, companies perform physical inventories

Done as a control to verify inventory levels, in order to detect theft or "shrinkage"

9

Morrow Snowboards, Inc.

Investors were scared because of accounting problems

To reduce concerns, they implemented a perceptual inventory system

10

Purchase invoice

Indicates the total purchase price and other relevant information

each purchase should have one

11

purchases for merchandise (under perpetual)

Recorded in the Inventory Account

12

FOB

free on board

13

FOB shipping point

The seller places the goods free on board the carrier

Buyer pays freight costs

14

FOB destination

Seller places good free on board to the buyer's place of business

Seller plays the freight costs

15

When buyer pays freight charges, _____________

"FOB shipping point"

Inventory is increased

16

When seller incurrs the freight costs, _______________

They are an operating expense the seller

Increase in the "Freight-out" or "Delivery expense" accounts

*sellers often increase invoice price to cover 

17

Purchase return

A return of goods from the buyer to the seller for cash or credit

18

Purchase allowance

A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise

19

purchase discount

A cash discount claimed by a buyer for prompt payment of a balance due

20

credit terms

specify the amount of the cash discount and time period during which it is offered

21

discount period

between the invoic date and the payment

22

meaning of net in "net 30"

The remaining amount due after subtracting any returns and allowances and partial payments

23

Sales invoice

A documentthat provides support for each sale

24

Cash register tapes

Provide evidence of cash sales

25

Business document

Provides written evidence of the sale

26

Ethics note: General Electric

Try to improve quality of financial reporting

Provides more detail on revenue and operating profits

27

If the seller is granted an allowance, the company journals it as ________________________________

Debit sales returns and Allowances

Credit Accounts Receievable

*FOR THE AMOUNT OF ALLOWANCE*

28

Sales Returns and Allowances Account

Contra revenue account to Sales Revenue

Normal balance = debit

29

Sales discount account

Given by seller for a prompt payment of balance due

Contra revenue acocunt to sales revenue

Normal balance = debit

30

Single step income statement

Includes revenues and expenses

*company does not realize profit or income until total revenues exceed total expenses

*simple and easy to read

31

Multi-step income statement components

Gross profit

Income from operations

Net income

32

Gross profit

Net sales - cost of goods sold

33

Income from operations

Gross profit - operating expenses

34

International note: IASB and FASB

Working to evaluate format of financial statements

Income statement format that better reflects how businesses are run

35

Gross profit represents ________________

Merchandising profit

Comparrisons with past gross profit indicate the dffictiveness of a company's purchasing and pricing policies

36

Nonoperating activities

Consists of various revenues and expenses and gains and losses that are unreleated to the company's main line of operations

under "Income from operations"

37

Ethics note: ConAgra

recorded a nonrecurring gain for $186 million from the sale of Pilgrim's Pride stock to help meet an earnings projection for the quarter

38

Periodic system equation

Beginning inventory

+

Cost of Goods purchased

= Cost of Goods available for sale

- ending inventory

= Cost of goods sold

39

Gross profit rate =

Gross profit

Net sales

40

Profit Margin Ratio

Net income

Net Sales

41

What does the profit margin ratio measure?

Measures the extent by which selling price covers all expenses

42

3.4% profit margin

Company generates 3.3 cents of profit on each dollar of sales

43

Quality of earnings ratio =

Net Cash provided by operating activities

Net income

44

A number significantly greater than one for quality of earnings ratio

suggests a company is using conservative accounting, delay the recognition of income

45

A number significantly less than one quality of earnigs ratio

Comapny is using agressive accounting in order to accelerate income recognition

46

Purchases of merchandise in a periodic system

Under Purchases account rather than inventory account

47

Freight-in

Temporary account whose normal balance is debit

*a part of cost of goods purchaed*

48

Purchase Returns and Allowances

A temporary account

Normal balance = credit

49

Purchase Discounts

Temporary account

Normal balance = credit

50