Flashcards in unit 4 Deck (43):
1
Service organizations sell time to
earn revenue.
Examples: Accounting firms, law firms,
and plumbing services
2
Merchandising companies sell products to
earn revenue.
Examples: sporting goods, clothing, and auto parts stores
3
Perpetual systems
updates accounting
records for each
purchase and sale of
merchandising
4
Periodic systems
Updates records for
purchase and sale of
merchandise only at the
end of the accounting
period
5
Credit Terms
A deduction from the invoice price granted
to induce early payment of the amount due.
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Purchase Discounts
2/10,n/30
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period
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Purchase Return:
Merchandise returned by the purchaser to the
supplier.
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Purchase Allowance:
A price reduction to the buyer of defective or
unacceptable merchandise.
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Each sales transaction for a seller of
merchandise involves two parts:
1.Revenue received
in the form of an
asset from a
customer.
2.Recognition of the
cost of merchandise
sold to a customer.
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Sales discounts on credit sales can benefit a seller by
decreasing the delay in receiving cash and reducing future
collection efforts.
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Shrinkage:
adjustment to reflect loss of merchandise:
12
New revenue recognition rules require reporting of sales at
net amount expected. Adjusting entries required for:
1. Expected sales discounts
2. Expected returns and allowances (revenue side)
3. Expected returns and allowances (cost side)
13
Gross margin ratio =
Net sales - Cost of goods sold divided by
Net sales
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Acid-test
ratio
Cash + Short-term investments + Receivables/
Current liabilities
A common rule of thumb is the acid-test ratio should have a
value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
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Gross
margin
ratio
Net sales - Cost of goods sold/
Net sales
Percentage of dollar sales available to
cover expenses and provide a profit.
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Merchandise inventory includes
all goods that a
company owns and holds for sale, regardless of where
the goods are located when inventory is counted.
17
Internal Controls and Taking a Physical Count
Most companies take a
physical count of
inventory at least once
each year.
When the physical count
does not match the
Merchandise Inventory
account, an adjustment must
be made.
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Good internal controls over count include:
1. Pre-numbered inventory tickets.
2. Counters have no inventory responsibility.
3. Counters confirm existence, amount, and
quality of inventory item.
4. Second count is taken.
5. Manager confirms all items counted.
19
Management decisions in accounting for inventory
involve the following:
1. Items included in inventory and their costs.
2. Costing method (specific identification, FIFO, LIFO,
or weighted average).
3. Inventory system (perpetual or periodic).
4. Use of market values or other estimates.
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Sales discount
Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.
21
Credit period
Time period that can pass before a customer’s payment is due.
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Discount period
Time period in which a cash discount is available and the buyer can make a reduced payment.
23
FOB(free on board) destination
the seller pays shipping costs and the buyer accepts ownership of goods at the buyer’s place of business
24
FOB(free on board) shipping point
the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier
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Gross profit
Net sales minus cost of goods sold; also called gross margin.
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Merchandise inventory
Goods that a company owns and expects to sell to customers; also called merchandise or inventory.
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Purchase discount
Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.
28
Cash discount
Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.
29
Trade discount
Reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers.
30
Sales returns refer
to
merchandise that
customers return to
the seller after a
sale.
31
Sales allowances
refer to
reductions in
the selling price of
merchandise sold to
customers.
32
International Accounting Standards Board (IASB)
independent group (consisting of individuals from many countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices. These standards are in many ways similar to, but sometimes different from, U.S. GAAP. Differences between U.S. GAAP and IFRS have been decreasing in recent years as the FASB and IASB pursued a process aimed at reducing inconsistencies.
33
generally accepted accounting principles (GAAP).
GAAP aims to make information relevant, reliable, and comparable. Relevant information affects decisions of users. Reliable information is trusted by users. Comparable information aids in contrasting organizations.
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Accounting Principles
measurement principle
Revenue recognition
Expense recognition
Full disclosure
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measurement principle( also called the cost principle)
prescribes that accounting information is based on actual cost (with possible later adjustments to market). Cost is measured on a cash or equal-to-cash basis. This means if cash is given for a service, its cost is measured by the cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost is measured as the cash value of what is given up or received. The cost principle emphasizes reliability and verifiability, and information based on cost is considered objective. Objectivity means that information is supported by independent, un-biased evidence; it is more than an opinion. Later chapters introduce fair value
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revenue recognition principle
prescribes that revenue is recognized (1) when goods or services are provided to customers and (2) at the amount expected to be received from the customer. The amount received is usually in cash, but it is also common to receive a customer’s promise to pay at a future date, called credit sales. (To recognize means to record it.)
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expense recognition principle(also called the matching principle)
prescribes that a company record the expenses it incurred to generate the revenue reported. The principles of matching and revenue recognition are key to modern accounting.
38
Accounting Assumptions There are four accounting assumptions.
going-concern assumption
monetary unit assumption
business entity assumption
time period assumption
39
going-concern assumption
means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold. This implies, for example, that property is reported at cost instead of, say, liquidation value, which assumes closure.
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monetary unit assumption
means that we can express transactions and events in monetary, or money, units. Money is the common denominator in business. Examples of monetary units are the dollar in the United States and the peso in Mexico.
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time period assumption
presumes that the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.
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business entity assumption
means that a business is accounted for separately from other business entities, including its owner. A business entity can take one of three legal forms: proprietorship, partnership, or corporation.
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