Financial Accounting: Sales Revenue, Receivables, Cash, and Inventory

Comprehensive vocabulary flashcards covering key definitions, accounting rules, financial ratios, and costing assumptions from Chapters 6 and 7.

Revenue Recognition Principle

The accounting principle requiring revenues to be recorded when a company transfers promised goods or services to customers, in the amount the company expects to be entitled to receive.

Net Sales

The top-line sales figure reported on the income statement, computed as gross sales revenue minus deductions for sales returns, allowances, and sales discounts: $\text{Net Sales} = \text{Gross Sales Revenue} - \text{Sales Returns \& Allowances} - \text{Sales Discounts}$.

FOB Shipping Point

Shipping terms specifying that title and risks of ownership transfer to the buyer at the shipping point (upon shipment). The buyer normally pays shipping and counts goods in transit as inventory; the seller recognizes revenue upon shipment.

FOB Destination

Shipping terms specifying that title and risks of ownership transfer to the buyer upon delivery. The seller normally pays shipping, retains goods in transit within inventory, and recognizes revenue only upon delivery.

Sales Discount (Cash Discount)

An early payment incentive offered to business customers on credit terms (e.g., $2/10, n/30$) that encourages prompt payment, recorded as a contra-revenue account reducing gross sales.

Sales Returns and Allowances

A contra-revenue account subtracted from gross sales revenue on the income statement to accumulate refunds, price reductions, or account credits granted for damaged or unsatisfactory goods.

Five-Step Revenue Recognition Process

The standard FASB framework for recognizing revenue from customer contracts: (1) Identify the contract, (2) Identify performance obligations, (3) Determine transaction price, (4) Allocate transaction price to performance obligations, and (5) Recognize revenue when/as each obligation is satisfied.

Trade Receivables

Receivables created in the normal course of business when a credit sale of merchandise or services occurs to a customer on an open account.

Nontrade Receivables

Receivables that arise from transactions other than sales made in the normal course of business, such as loans to employees.

Foreign Currency Receivables

Accounts receivable resulting from export sales where the buyer agrees to pay in foreign currency; must be converted to U.S. dollars using the end-of-period exchange rate before financial statement reporting.

Allowance Method

A GAAP-required approach for measuring uncollectible accounts receivable that estimates bad debts in the period of sale to comply with the matching principle, rather than waiting for specific accounts to be written off.

Bad Debt Expense

The estimated expense associated with uncollectible accounts receivable, recorded through an adjusting journal entry at period-end and reported under General and Administrative expenses on the income statement.

Allowance for Doubtful Accounts

A contra-asset account with a normal credit balance that is subtracted from gross Accounts Receivable on the balance sheet to report receivables at their net realizable value.

Percentage of Credit Sales Method

An income statement approach to estimating bad debts that directly computes current-period Bad Debt Expense by multiplying credit sales by an estimated historical loss rate: $\text{Bad Debt Expense} = \text{Credit Sales} \times \text{Bad Debt Loss Rate}$.

Aging of Accounts Receivable Method

A balance sheet approach that groups trade receivables by days outstanding, applying higher estimated loss rates to older accounts to compute the target ending balance of the Allowance for Doubtful Accounts.

Receivables Turnover Ratio

A key ratio measuring how many times a company records and collects its average trade receivables balance over a year: $\text{Receivables Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Net Trade Accounts Receivable}}$.

Average Collection Period

A measure of the average number of days required to collect cash from customers: $\text{Average Collection Period} = \frac{365}{\text{Receivables Turnover}}$.

Cash Equivalents

Short-term, highly liquid investments with an original maturity of three months or less that are readily convertible into cash and have negligible sensitivity to interest rate fluctuations (e.g., Treasury bills, bank CDs).

Bank Reconciliation

A monthly internal control process comparing and explaining the differences between the ending cash balance reported on the bank statement and the ending balance recorded in the company's cash ledger.

Cost of Goods Available for Sale

The sum of beginning inventory plus purchases during the period, representing the total inventory cost that must be split between Cost of Goods Sold and Ending Inventory: $\text{Goods Available for Sale} = \text{Beginning Inventory} + \text{Purchases}$.

Cost of Goods Sold (COGS)

The recorded cost of merchandise sold to customers during the accounting period: $\text{Cost of Goods Sold} = \text{Beginning Inventory} + \text{Purchases} - \text{Ending Inventory}$.

Perpetual Inventory System

An inventory system that continuously updates inventory and Cost of Goods Sold accounts with every purchase and sale, recording two journal entries at the time of each sale.

Periodic Inventory System

An inventory system where no up-to-date inventory record is maintained during the year; Cost of Goods Sold is calculated at period-end following a physical inventory count.

Specific Identification Method

An inventory costing method that tracks and records the actual purchase cost of each individual item sold, best suited for unique, identifiable, high-value goods such as vehicles or jewelry.

First-In, First-Out (FIFO)

An inventory cost flow assumption that allocates the oldest unit costs to Cost of Goods Sold on the income statement and leaves the newest unit costs in ending inventory on the balance sheet.

Last-In, First-Out (LIFO)

An inventory cost flow assumption allocating the most recent unit costs to Cost of Goods Sold and leaving the oldest unit costs in ending inventory; allowed under U.S. GAAP but prohibited by IFRS.

Average Cost Method

An inventory costing method that allocates the weighted average unit cost of goods available for sale ($\text{Weighted Average Cost} = \frac{\text{Cost of Goods Available for Sale}}{\text{Units Available for Sale}}$) equally to both Cost of Goods Sold and Ending Inventory.

LIFO Conformity Rule

A U.S. tax requirement mandating that if a company chooses LIFO to determine its cost of goods sold on its federal income tax return, it must also use LIFO for financial reporting purposes.

Lower of Cost or Net Realizable Value (LCNRV)

A conservative valuation rule requiring inventory to be written down to net realizable value (sales price less costs to sell) whenever net realizable value drops below recorded historical cost.

LIFO Reserve

A contra-asset footnote disclosure by companies using LIFO showing the cumulative excess of inventory valued under FIFO over its reported value under LIFO: $\text{LIFO Reserve} = \text{FIFO Inventory} - \text{LIFO Inventory}$.

Inventory Turnover Ratio

A ratio measuring how many times average inventory was produced and sold during an accounting period: $\text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$.

Days to Sell Inventory

A metric reflecting the average time in days required to sell inventory to customers: $\text{Days to Sell Inventory} = \frac{365}{\text{Inventory Turnover}}$.