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Flashcards in Exam 2 Deck (55):
1

Cost of goods sold

represents the cost of inventory actually sold during a period

2

net sales

total revenues -- sales returns and allowances -- sales discounts = net sales

3

gross profit

net sales -- cost of goods sold = gross profit

4

operating expenses

general expense category for selling and administrative costs

5

sales returns and allowances

used when a customer returns merchandise, it is a contra-revenue account that is deducted from sales to yield "net sales"

6

allowances

refer to reductions in price due to minor defects (e.g. wrong color sent)

7

cash discount

reduction in invoice to encourage prompt payment - terms: 2/10, n/30 (2% discount if paid within 10 days, otherwise net amount paid within 30 days)

8

perpetual inventory system

real-time inventory system that updates inventory records with each purchase and sale - discounts and returns reduce the inventory account

9

periodic inventory system

system that utilizes a Purchases account and does not update inventory with each sale; inventory is updated by physical count at the end of accounting period

10

FOB destination

Seller pays to get the goods to the destination

11

FOB shipping point

Buyer pays to get the goods to the destination

12

cost of goods sold (closing entry)

it is an expense account and closed at the end of the period with a credit to the account

13

gross profit margin equation

gross profit/net sales = gross profit margin

14

net profit on sales equation

net income/net sales = net profit on sales

15

cash

coins, currency, deposits with a bank, checks, and money orders

16

cash equivalents

short-term interest-earning financial instruments that are deemed to be highly secure and will convert back into cash within 90 days

17

external strategies to increase cash inflows

issue additional shares of stock or borrow additional funds

18

internal strategies to increase cash inflows

accelerate cash collections (e.g. electronic payments, discounts, etc.), postpone cash outflows, cash control

19

bank reconciliation

independently identify errors, irregularities, and adjustments to the Cash account

20

items on company books but not recorded by bank

deposits in transit, outstanding checks

21

deposits in transit

those not processed by the bank

22

outstanding checks

checks written but not cleared by bank

23

items on bank records but not on company boods

nonsufficient funds (NSF) checks, bank service charges, receivables collected by the bank and interest earnings

24

NSF checks

previously deposited but returned for nonpayment (i.e., bounced checks)

25

what to do after bank reconciliation

journal entries must be prepared for all items identified that affect the company's cash book balance

26

petty cash

fund established for making small payments that are impractical to pay by check - established by writing out/cashing a check and placing in a petty cash box

27

replenishment of petty cash

another check for cash is prepared to bring the fund back up to the original level - expenses recorded and cash short/over used if needed (petty cash is not impacted in journal entry)

28

trading securities

investments acquired with the intent of generating profits by reselling investments in very near future - initially recorded at cost then later recorded at fair value

29

fair value

the price that would be received from the sale of an asset in an orderly transaction between market participants

30

fair value accounting

rationale: market value for trading securities can be determined and fluctuations have a definite economic impact that should be reported

31

dividends and interest

amount of interest and dividends received on trading securities is probably not very significant due to their quick turnovers - if received, reported as income (dividend or interest income)

32

uncollectible receivables

some sales on account may not be collected - frequently called bad debts

33

direct Write-off method

a specific account receivable is removed from the accounting records at the time it is finally determined to be uncollectible (uncollectible expense debited and A/R credited)

34

allowance method

record estimated bad debts expense in the same period as the related revenues - the actual write off in a subsequent period will likely not impact income

35

allowance for uncollectible accounts account

it is a contra-asset and reduces the receivables to the amount expected to be collected (termed net realizable value)

36

percentage of total receivables method

ex) 6% of all outstanding receivables estimated to be uncollectible

37

aging of accounts receivable method

group receivables according to how long they have to be outstanding - different percentages for each group

38

percentage of sales method

estimated percentage of sales is simply debited to uncollectible accounts expense and credited to the allowance for uncollectible accounts each period (ex. 3% of sales is estimated uncollectible)

39

writing off uncollectible accounts

the entry reduces both the allowance account and the related receivable (no impact on the income statement or net realizable value of receivables)

40

accounts receivable turnover ratio

measures how many times a firm's receivables are converted to cash during the year

41

accounts receivable turnover ratio equation

net credit sales/average net accounts receivable = accounts receivable turnover ratio

42

days outstanding

measures how many days sales are carried in the receivables category

43

days outstanding equation

365 days/accounts receivable turnover ratio = days outstanding

44

notes receivable

written promises from clients or customers to pay a definite amount of money on a specific future date

45

cost-flow assumptions

assumptions about how costs are assigned to inventory in accounting records

46

specific identification

Businesses identify each unit of merchandise with the unit’s cost and retain that identification until the inventory is sold

47

FIFO

The oldest costs (i.e., the first in) are matched against revenue and assigned to cost of goods sold

48

LIFO

The recent costs (i.e., the last-in) are matched against revenue and assigned to cost of goods sold

49

Weighted-average

An average unit cost is used to calculate cost of goods sold and ending inventory

50

conservatism

dictates that accountants avoid overstatement of assets and income

51

lower of cost or market

if inventory is carried on the accounting records at greater than its market value, a write-down is made (inventory is credited and loss for decline in market value is debited [reduces income])

52

Net Realizable value

a ceiling that the market cannot exceed (NRV = selling price - competition and disposal costs)

53

floor equation

floor = NRV - normal profit margin

54

inventory turnover ratio

shows the number of times that a firm's inventory balance was turned during a year

55

inventory turnover ratio equation

cost of goods sold/average inventory = inventory turnover ratio