chapter 4,5,6 key concept and term for financial accounting

Merchandising Companies:

These are stores that buy stuff (like toys) from big suppliers and sell them to kids and parents. It’s different from a service business, like a haircut shop, where you just do something for people.
Example: Your toy store buys dolls from a factory and sells them. A haircut shop doesn’t buy anything to sell—they just cut hair.

Inventory

Stuff you own but haven’t sold yet, like toys on your shelf. It’s like your “treasure” on the balance sheet (a list of what you own).
Example: You buy 10 dolls for $5 each. Until you sell them, they’re inventory—your store’s “stuff waiting to be sold.”

Sales

Money you get from selling stuff. It’s your main “income” on the income statement (a report showing if you made money).
Example: You sell a doll for $10. That’s sales! It goes on your “earnings report.”

Cost of Goods Sold (COGS):

The money you spent to buy the stuff you sold. It’s like the “cost” part that gets subtracted from sales to see your profit.
Example: You bought that doll for $5 and sold it for $10. COGS is $5—the price you paid to get it.

Accrual Accounting:

A way to track money where you record sales when you sell something, not when you get the cash. Same for costs.
Example: You sell a toy on credit (promise to pay later). You record the sale now, even if cash comes next week.

Income Statement Format

A report showing your store’s money story: What you sold minus costs equals profit, minus other bills equals final profit.
Example: Sales $100 (toys sold) - COGS $50 (what you paid for them) = Gross Profit $50. Then subtract store rent $20 = Income from Operations $30. Subtract other stuff like ads $5 = Net Income $25 (your final win!).

Perpetual Inventory System:

Always keeping track of how many toys you have and what they cost, like updating a list every time you buy or sell.
Example: You buy 5 dolls, add to your list. Sell 2, subtract from list and note the cost right away.

Periodic Inventory System:

You don’t track toys every day. At the end of the month, you count what’s left and figure out what you sold.
Example: Start with 10 dolls, buy 20 more. At month end, count 15 left. So, you sold 15 (10 + 20 - 15).

Schedule of Cost of Goods Sold:

A quick math sheet for periodic system: Start stuff + bought stuff = available - left stuff = sold cost.
Example: Start $100 toys + bought $200 = $300 available - $150 left = $150 COGS.

Acquisition Cost of Inventory:

All the money to get your toys ready to sell, like price minus discounts plus shipping.
Example: Doll costs $5, but you get $1 discount and pay $0.50 shipping. Total cost: $4.50.

Purchases Returns and Allowances:

Sending back bad stuff or getting a price cut.
Example: A doll is broken, so you return it and get your money back.

Purchase Discounts:

A reward for paying fast, like “pay in 10 days, save 2%.”
Example: Bill $100, terms 2/10 n/30. Pay in 10 days, pay only $98.

Transportation Costs (FOB Terms):

Who pays shipping. FOB Shipping Point: You pay. FOB Destination: Seller pays.
Example: FOB Shipping Point—you add shipping cost to your inventory like extra treasure cost.

Sales Transactions:

Recording when you sell: Add sales and subtract inventory cost.
Example: Sell doll for $10 (cost $5): Record $10 sales, $5 COGS.

Sales Returns and Allowances:

Customer brings back stuff.
Example: Kid returns doll, you give money back and add doll back to inventory.

Sales Discounts:

Customer pays fast, gets a cut.
Example: Same as purchase discount, but you give it.

Net Sales:

Sales minus returns minus discounts.
Example: $100 sales - $10 return - $2 discount = $88 net.

Transportation-Out Expense:

Shipping cost you pay to send to customer.
Example: You ship a toy, pay $2—it’s a selling cost.

Lost/Damaged/Stolen Merchandise:

Stuff gone bad—count as a loss.
Example: A toy breaks, you subtract from inventory.

Common Size Income Statement: (Financial analysis)

Everything as a percent of sales, to compare stores.
Example: COGS $50 / Sales $100 = 50%.

Gross Margin Percentage: (Financial analysis)

Profit per dollar sold before other bills. Higher is better.
Example: (Sales $100 - COGS $50) / $100 = 50%.

Return on Sales:

Final profit per dollar sold.
Example: Net Income $25 / Sales $100 = 25%.

Inventory Valuation:

Figuring out the cost of your unsold toys and sold ones. Important because toys are big money, and sold costs are big bills.
Example: You have 10 dolls. What did they cost? What about the ones you sold?

Cost of Goods Available for Sale (CGAS):

Start toys + bought toys.
Example: Start $100 + buy $200 = $300 available.

Allocation

Split available costs: Sold (COGS) + left (Ending Inventory) = available.
Example: Sold $150 + left $150 = $300.

Perpetual Inventory System:

Track toys and costs all the time.
Example: Sell a doll, subtract cost right away.

Inventory Cost Flow Assumptions:

Ways to guess which toy costs go to sold or left (doesn’t have to match real picking).
Example: Like deciding if you sell old toys first or new ones.

Specific Identification:

Track each toy’s exact cost.
Example: Doll A cost $5, sell it—COGS $5.

Weighted-Average:

Average all costs.
Example: $300 for 30 dolls = $10 each. Sell 10 = COGS $100.

FIFO (First-In, First-Out):

Sell oldest first.
Example: Old dolls $5 each sold first, new $6 left.

LIFO (Last-In, First-Out):

Sell newest first.
Example: New $6 sold first, old $5 left.

Effects in Rising Prices:

Prices up? LIFO makes sold costs high (less profit, less tax). FIFO opposite.
Example: Dolls cost more now—LIFO uses high cost for sold, saves tax.

Lower of Cost or Market Rule

If toys worth less now, use lower price (be careful).
Example: Doll cost $5, now worth $4—use $4.

Inventory Errors:

Wrong count messes up profit.
Example: Think you have more left? Profit too high this year, low next.

Inventory Turnover: (financial analysis)

How fast you sell toys (COGS / Inventory). Low = too many toys sitting; high = might run out.
Example: COGS $200 / Inventory $100 = 2 times.

Average Number of Days to Sell Inventory: (Financial analysis)

365 / Turnover.
Example: 365 / 2 = 182 days to sell all.

Internal Control:

Rules to protect your stuff and keep records honest.
Example: Lock your piggy bank so no one steals, and count money to avoid mistakes.

Electronic Funds Transfers (EFT):

Sending money online instead of checks (faster, but need extra safety).
Example: Pay for toys with app instead of paper check.

Cash

Money you can use right away: Coins, bills, checks, bank money.
Example: Your allowance in wallet or bank—anything to buy candy now.

Cash Equivalents:

Super-safe quick money, like savings that turn to cash fast (under 3 months).
Example: A short-term bank note like a promise for money soon.

Bank Reconciliation:

Match your money count with bank’s to find mistakes.
Example: You think $10 in bank, bank says $8—figure out why (maybe check not cashed).

Outstanding Checks: (Cause of Difference)

Check you wrote but not cashed yet.
Example: Gave friend $2 check, they didn’t cash—bank thinks you have more.

Deposits in Transit: (causes of difference)

Money you put in but bank not counted yet.
Example: Dropped $5 in bank after closing—your book has it, bank doesn’t.

Charges by Bank: (Causes of difference)

Fees bank takes.
Example: Bank charges $1 for account—subtract from your book.

NSF Checks: (Causes of difference)

Bounced check (no money in sender’s bank).
Example: Friend’s check bounces—subtract from your book.

Deposits by Bank (Causes of differences)

Bank adds interest or collects for you.
Example: Bank adds $0.50 interest—add to your book.

Errors (Causes of difference)

Mistakes by you or bank.
Example: You wrote $10 but meant $1—fix your book.

Adjusting Entries

Fixes to make your book match real.
Example: Add interest bank gave.

Petty Cash Fund:

Small money box for tiny buys.
Example: $20 for quick candy or stamps.

Independent Auditor:

Outside checker to make sure records true.
Example: Like a teacher grading your math homework.