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Flashcards in Powerpoint 6 Deck (14):

Which operating cycle is longer?

Merchansing operating cycle > Service company op. cycle


Under a periodic system, Cost of Goods Sold is determined at the __________________

end of the period


Purchases account for periodic

used rather than inventory account

normal balance = debit


For periodic, instead of inventory account, use:

Purchase Returns and Allowances

Purchase Discounts

Freight Costs on Purchases


Perepetual system Cost of Goods Sold

An entry is made to record cost of goods sold each time a sale is made


Periodic system Cost of Goods Sold

The balance of cost of goods sold is not determined until the end of the period

Beginning inventory


Cost of goods purchased = Cost of Goods available for sale


Ending Inventory

= Cost of Goods Sold


Operating vs. Non-operating

operating income as recurring

non-operating activities as nonrecurring

*When forecasting next year's income, analysts put the most weight on this year's operating income and NOT on non-operating income


Gross Profit Rate

Gross Profit

Net Sales

Gross profit measured as a percentage of net sales (profitability)

Measures the margin by which selling price exceeds cost of goods sold

ex. 45% (selling price exceeds cost of goods sold by 45%)


Profit Margin Ratio

Net Income

Net Sales

*Measures the percentage of each dollar of sales that results in net income

*Measures the extent by which selling price covers all expenses


To improve profit margin ratio:

Increase Gross Profit Rate


Control Operating Expenses and Other Costs


High Turnover Industries and Profit Margin Ratio

Usually experience low profit margins


Quality of Earnings Ratio

Net Cash Provided by Operating Activities

Net Income


Greater than 1 Quality of Earnings Ratio

Company is using conservative accounting techniques, delay recognition of income


Less than 1 Quality of Earnings Ratio

Company is using more aggressive accounting techniques to accelerate income recognition