BUSACC 0030 Financial Accounting - Exam 2 Review (Chapters 6-8)

Comprehensive practice flashcards defining core vocabulary, concepts, formulas, and accounting rules from Chapters 6, 7, and 8 of BUSACC 0030 Financial Accounting.

Allowance for Doubtful Accounts

A contra-asset account deducted from gross Accounts Receivable that reflects management's estimate of uncollectible customer balances.

Aging of Accounts Receivable Method

A balance sheet approach for estimating uncollectible accounts where receivables are grouped by age to determine the required ending balance of the Allowance for Doubtful Accounts; Bad Debt Expense is calculated as the amount needed to adjust the existing allowance balance to that required ending balance.

Percentage of Credit Sales Method

An income statement approach where Bad Debt Expense is computed directly by multiplying net credit sales by an estimated uncollectible percentage, without regard to the existing balance in the Allowance for Doubtful Accounts.

Write-Off under the Allowance Method

An accounting entry that debits Allowance for Doubtful Accounts and credits Accounts Receivable to remove a specific uncollectible account; it has zero effect on net Accounts Receivable and zero effect on net income.

Net Accounts Receivable

The net realizable value of receivables reported on the balance sheet, calculated as gross Accounts Receivable minus the Allowance for Doubtful Accounts.

Allowance Roll-Forward (Schedule II)

A financial disclosure tracking changes in the Allowance for Doubtful Accounts over the year: $\text{Beginning Balance} + \text{Bad Debt Expense} - \text{Accounts Written Off} + \text{Recoveries} = \text{Ending Balance}$.

Net Sales

Gross Sales Revenue minus contra-revenue accounts, specifically Sales Returns and Allowances, Sales Discounts, and Credit Card Discounts.

Credit Card Discount

A fee charged by a credit card processing company (e.g., $2\%$ of credit card sales) that is deducted from gross sales when determining net sales.

Bank Reconciliation

The schedule that resolves differences between the bank statement ending cash balance and the company's ledger cash balance, adjusting for items like deposits in transit, outstanding checks, service charges, interest earned, and NSF checks.

Deposit in Transit

Cash or checks recorded on the company's books that have been deposited but not yet processed or shown on the bank statement; added to the bank balance during bank reconciliation.

Outstanding Checks

Checks written and recorded by the company that have not yet cleared the bank; deducted from the bank statement balance in a bank reconciliation.

NSF (Non-Sufficient Funds) Check

A customer's check returned unpaid by the bank due to insufficient funds; deducted from the company's book balance during bank reconciliation and charged back to Accounts Receivable.

Periodic Inventory System

An inventory system that determines Cost of Goods Sold and ending inventory only at the end of the accounting period following a physical count, using the formula: $\text{Beginning Inventory} + \text{Net Purchases} - \text{Ending Inventory} = \text{Cost of Goods Sold}$.

Perpetual Inventory System

An inventory system that continuously updates inventory balances and records Cost of Goods Sold immediately at the time of each sale.

FIFO (First-In, First-Out)

A cost flow method assuming that the oldest inventory costs are transferred to Cost of Goods Sold first, leaving the most recent purchase costs in ending inventory (closest to current replacement cost).

LIFO (Last-In, First-Out)

A cost flow method assuming that the most recently acquired goods are sold first; during periods of rising prices, it results in higher Cost of Goods Sold, lower net income, and the lowest income tax liability.

Weighted-Average Cost Method

A periodic cost-flow method that computes an average unit cost by dividing the total cost of goods available for sale by the total number of units available for sale, applying this unit cost to both Cost of Goods Sold and ending inventory.

Lower of Cost or Net Realizable Value (LCNRV)

A rule requiring inventory to be written down on the balance sheet when its net realizable value (selling price less selling costs) falls below its historical cost; under U.S. GAAP, write-downs cannot be reversed if value rises later.

Inventory Turnover Ratio

A measure of how many times inventory is sold during a period, calculated as: $\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$.

FOB Destination

Shipping terms where title and risk of loss transfer to the buyer only when the goods reach the buyer's destination; goods in transit remain in the seller's inventory.

FOB Shipping Point

Shipping terms where title and risk of loss pass to the buyer the moment the seller delivers goods to the shipping carrier; goods in transit belong to the buyer's inventory.

Inventory Error Counterbalancing

An accounting principle where an overstatement of ending inventory in year 1 causes year 1 pretax income to be overstated, but causes year 2 beginning inventory to be overstated and year 2 pretax income to be understated by the exact same amount.

Capitalize vs. Expense

The requirement to record expenditures that provide future economic value beyond the current year (such as purchase price, freight-in, sales tax, installation, and asset additions) in an asset account, while ordinary maintenance, repairs, and recurring operational costs must be expensed immediately.

Land Account

A non-depreciable asset account that includes the purchase price of real estate, closing costs, title fees, and costs to demolish old existing buildings to prepare the site for use.

Land Improvements

Structural additions to land that have limited useful lives (such as paved parking lots, lighting, and fences); these are recorded in a separate depreciable asset account rather than the Land account.

Straight-Line Depreciation

A depreciation method allocating an equal amount of expense to each period over the asset's useful life: $\frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$.

Double-Declining Balance (DDB) Method

An accelerated depreciation method applying a constant rate equal to twice the straight-line rate ($\frac{2}{\text{Useful Life}}$) to the asset's beginning book value each year, without subtracting residual value until the book value approaches residual value.

Units-of-Production Depreciation

A variable depreciation method based on actual operational usage, calculated as: $\frac{\text{Cost} - \text{Residual Value}}{\text{Estimated Total Output}} \times \text{Units or Miles Produced in Period}$.

Book Value (Carrying Value)

The net reported value of a plant asset on the balance sheet, calculated as the asset's original historical cost minus its accumulated depreciation.

Revision of Depreciation Estimates

A prospective accounting change made when an asset's useful life or residual value estimate changes; calculated as: $\frac{\text{Remaining Book Value} - \text{New Residual Value}}{\text{Remaining Useful Life}}$.

Gain or Loss on Sale of Assets

The difference reported on the income statement when selling a plant asset, determined by subtracting the asset's book value at the date of sale from the cash proceeds received ($\text{Cash Proceeds} - \text{Book Value}$).

Goodwill

An intangible asset recognized when a company acquires an entire business for a price that exceeds the fair market value of the net identifiable assets acquired ($\text{Purchase Price} - (\text{Fair Value of Identifiable Assets} - \text{Liabilities Assumed})$).