Revenue Recognition, Receivables, and Inventory Accounting

Comprehensive practice flashcards defining key accounting terminology and concepts covering revenue recognition, gross and net methods for sales receivables, discounts, sales allowances, inventory classifications, manufacturer cost flows, COGS calculations, and transportation terms.

Cash-basis accounting

An accounting method that recognizes revenue in the period payment is received (such as on a tax return).

Accrual-basis accounting

An accounting method that recognizes revenue when a company satisfies its performance obligation, regardless of when cash is collected.

Revenue recognition (Retail vs. Service)

Under FASB guidance, revenue is recognized at the point of sale for most retail organizations, whereas service industries recognize revenue as the service is performed (e.g., a $1$-year gym membership of $1,200$ recognized at $100$ per month).

Sales discount

A reduction of the normal selling price offered to encourage prompt payment, offering buyers a lower cost of goods/services and providing sellers with quicker cash.

$$2/10,\,n/30$$

A standard invoice notation stating credit terms where a $2\%$ discount is allowed if payment is made within $10$ days; otherwise, full payment is due within $30$ days.

Gross invoice amount

The full, pre-discount amount of an invoice expected when payment is made after the discount period has elapsed.

Net method (for receivables)

A conceptually preferred recording method where sales revenue and receivables are initially recorded at the net price assuming the customer will take the discount, motivated by the fact that saving $2\%$ over $20$ days equals an annual interest savings of $36.5\%$.

Gross method (for receivables)

An accounting approach that records receivables and revenue at the full gross invoice amount at the time of billing, offering the practical benefit of simplifying communication when customers are not expected to pay within the discount period.

Sales return

The return of unsatisfactory merchandise by a customer to the seller.

Sales allowance

A price reduction granted to a customer who agrees to keep merchandise that has minor defects or arrived late.

Returns & Allowances Liability

A liability account credited at the end of an accounting period for estimated sales allowances, ensuring revenue is reduced to the net amount expected to be collected.

Trade discount

A reduction in the selling price granted by the seller to a particular class of customers.

Quantity discount

A reduction in the selling price granted by the seller because unit selling costs are lower when larger quantities are purchased.

Receivable

Money due from another business or individual.

Note receivable

A receivable evidenced by a formal legal document stating repayment terms and amounts (principal and/or interest), typically bearing interest and due within $3$ to $12$ months (or over $1$ year if noncurrent).

Trade receivables vs. Nontrade receivables

Trade receivables are owed by customers purchasing inventory in the ordinary course of business, whereas nontrade receivables arise from transactions outside inventory sales (such as interest receivable or employee cash advances).

Inventory

Products held for resale that are classified as a current asset on the balance sheet.

Cost of goods sold (COGS)

The expense representing the outflow of resources caused by selling inventory; typically the most important expense on the income statement for merchandising and manufacturing companies.

Gross margin (Gross profit)

A key performance measure calculated as $\text{Revenue} - \text{Cost of Goods Sold} = \text{Gross Margin}$, reflecting resources available to cover selling and administrative expenses and provide net income.

Merchandisers

Companies, either retailers or wholesalers, that purchase finished inventory and hold it for resale without further processing.

Retailers vs. Wholesalers

Retailers are merchandisers that sell goods directly to consumers, while wholesalers sell inventory to other retailers.

Manufacturers

Companies that purchase and transform raw materials into finished products before selling them.

Raw materials inventory

The basic ingredients or materials acquired to make a manufactured product.

Work-in-process inventory

The inventory category representing raw materials entered into production combined with direct labor and manufacturing overhead.

Finished goods inventory

The completed manufactured products ready and available for sale; their sale reduces finished goods and increases cost of goods sold.

Manufacturer cost flow diagram

A model showing how product cost components (Raw Materials, Direct labor, and Manufacturing Overhead) flow into Work-in-process inventory, transfer to Finished Goods inventory on the balance sheet, and ultimately transition to Cost of Goods Sold on the income statement.

Cost of Goods Sold Model

The calculation formula: $\text{Beginning Inventory} + \text{Purchases (Inventory and Freight)} - \text{Returns and Allowances} = \text{Cost of Goods Available for Sale}$; then $\text{Cost of Goods Available for Sale} - \text{Ending Inventory} = \text{Cost of Goods Sold}$.

Perpetual inventory system

An inventory accounting system where cost of goods sold and inventory records are continuously updated on a transaction-by-transaction basis with each purchase and sale.

Periodic inventory system

An inventory system in which cost of goods sold is recorded only at the end of the accounting period, requiring a physical count or an approved estimation technique.

Historical cost principle (applied to inventory)

The accounting rule requiring inventory to be recorded at its acquisition purchase price plus all incidental costs incurred to bring goods to a salable condition at the company's location (including freight, insurance in transit, and taxes).

Discount period

The reduced payment window (e.g., $10$ days under $2/10,\,n/30$ terms) during which a purchaser can claim an offered cash discount on the invoice price.

Purchases

The cost of merchandise acquired for resale during the accounting period, recorded by debiting the inventory account and substantiated by invoices showing credit, freight, and description terms.

Purchase return

Merchandise returned by a purchaser to the supplier, accounted for by decreasing the inventory account.

Purchase allowance

A price reduction granted by a supplier when a purchaser agrees to keep defective or substandard goods, recorded by decreasing the inventory account.

Consignment

An arrangement where goods owned by one party are held and offered for sale by another party, with the retailer not owning or reporting the goods as inventory.

Consignor vs. Consignee

The consignor is the original owner who retains legal title to the merchandise; the consignee is the seller who holds the goods and earns a commission or fee upon sale.

F.O.B. shipping point

A freight term where title to the merchandise transfers from seller to buyer at the shipping point; the buyer is responsible for transit and typically pays the shipping charges.

Freight-in

Transportation costs paid by the buyer to transport acquired inventory under F.O.B. shipping point terms, which are included in the total cost of inventory.

F.O.B. destination

A freight term where title to the inventory transfers only when goods reach the buyer's destination; the seller pays for transportation costs.

Freight-out

Transportation expenses incurred and paid by the seller to ship goods to the buyer under F.O.B. destination terms.