Chapter4 accounting

Flashcards testing vocabulary and key accounting concepts related to merchandising operations, inventory systems, credit terms, and financial statement formats.

Merchandise

Products, also called goods, that a company buys to resell to customers.

Wholesaler

An intermediary that buys products from manufacturers and sells them to retailers.

Retailer

An intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

Cost of Goods Sold

The expense of buying and preparing merchandise sold to customers; also called cost of sales.

Gross Profit

Net sales minus cost of goods sold; also referred to as gross margin.

Merchandise Inventory

Products that a company owns and intends to sell, reported as a current asset on the balance sheet.

Merchandise Available for Sale

The sum of beginning inventory and net purchases in a period, which is either sold as cost of goods sold or retained as ending inventory.

Perpetual Inventory System

An inventory accounting system that continually updates accounting records for each purchase and each sale of inventory.

Periodic Inventory System

An inventory accounting system that updates accounting records for purchases and sales of inventory only at the end of an accounting period.

Credit Terms

The amounts and timing of payments required from a buyer to a seller, such as 2/10, n/60.

Credit Period

The total amount of time allowed before full payment is due for a purchase on credit.

Discount Period

The timeframe within which a buyer can make payment to receive a cash discount specified in credit terms.

Gross Method

An accounting method that initially records purchases or sales at their full gross invoice amount without assuming discounts will be taken.

Purchases Returns

Merchandise that a buyer purchases from a seller and subsequently returns to the seller.

Purchases Allowances

A price reduction granted by a seller to a buyer for defective or unacceptable merchandise that the buyer retains.

FOB Shipping Point

Shipping terms where ownership transfers to the buyer when goods depart the seller's place of business, making the buyer responsible for transit costs and risks.

FOB Destination

Shipping terms where ownership transfers to the buyer when goods arrive at the buyer's place of business, making the seller responsible for transit costs and risks.

Transportation-In

Freight charges paid by a buyer to transport inventory purchased under FOB shipping point terms, included in merchandise inventory cost; also called freight-in.

Delivery Expense

Freight charges paid by a seller to ship merchandise to customers under FOB destination terms, reported as a selling expense; also called freight-out.

Supplementary Records

Information kept outside the main ledger accounts used to track specific operational details such as purchase subtotals.

Sales Discounts

A contra revenue account with a normal debit balance used by sellers to record cash discounts taken by customers for prompt payment.

Sales Returns and Allowances

A contra revenue account with a normal debit balance used to record full refunds for returned goods or price reductions granted to customers.

Inventory Shrinkage

The loss of inventory due to theft, damage, or deterioration, calculated by comparing a physical inventory count with recorded amounts.

Multiple-Step Income Statement

An income statement format detailing net sales and expenses that reports subtotals for gross profit, income from operations, and net income.

Selling Expenses

Expenses incurred to market, sell, and distribute products and services to customers, such as advertising, store rent, and delivery costs.

General and Administrative Expenses

Expenses incurred to support a company's overall operations, such as office salaries, office equipment, and office supplies.

Nonoperating Activities

Revenues, expenses, gains, and losses unrelated to a company's main operations, such as interest revenue, dividend revenue, interest expense, and asset disposal gains.

Single-Step Income Statement

An income statement format that lists cost of goods sold alongside other expenses and presents a single subtotal for total expenses.

Acid-Test Ratio

A liquidity ratio defined as quick assets divided by current liabilities; computed as $\text{Acid-test ratio} = \frac{\text{Cash and cash equivalents} + \text{Short-term investments} + \text{Current receivables}}{\text{Current liabilities}}$.

Quick Assets

Highly liquid current assets consisting of cash, short-term investments, and current receivables.

Gross Margin Ratio

A profitability ratio defined as gross margin divided by net sales; computed as $\text{Gross margin ratio} = \frac{\text{Net sales} - \text{Cost of goods sold}}{\text{Net sales}}$.

Allowance for Sales Discounts

A contra asset account with a normal credit balance reported as a reduction to Accounts Receivable to account for expected future customer discounts.

Sales Refund Payable

A current liability account showing the estimated amount expected to be refunded to customers for future sales returns and allowances.

Inventory Returns Estimated

A current asset account showing the estimated cost of merchandise expected to be returned by customers in future periods.

Net Method

An accounting method that records purchases or sales initially at net amounts (net of cash discounts), assuming discounts will be taken.

Discounts Lost

An expense account reported on the income statement under the net method when a buyer fails to pay within the discount period.