ACCT 2301

What is a Cash Discount?

A reduction in price given by a seller to encourage prompt payment by the buyer.

How do you calculate Gross Margin?

Gross Margin = Net Sales - Cost of Goods Sold (COGS)

What is FOB Shipping Point?

The buyer takes ownership at the shipping point and pays for transportation costs (recorded as Transportation-in).

What is FOB Destination?

The seller maintains ownership until the goods arrive at their destination and pays for transportation costs (Transportation-out).

What is the Perpetual Inventory System?

An inventory tracking system that updates continuously for each sale or purchase.

What happens when inventory is purchased on account?

Inventory increases, Accounts Payable increases. No effect on the Income Statement.

What is the effect of Purchase Discounts?

Reduces Inventory and Accounts Payable. Example: 2/10, n/30 (2% discount if paid in 10 days, full payment due in 30 days).

How do you record Sales Revenue for an inventory sale?

1) Record the sale (increase Cash/AR & Revenue). 2) Record COGS (decrease Inventory & increase Expense).

What are the four inventory cost flow methods?

1. FIFO (First-In, First-Out), 2. LIFO (Last-In, First-Out), 3. Weighted-Average, 4. Specific Identification.

How does FIFO affect COGS in inflation?

Lower COGS, Higher Net Income. Older, lower-cost inventory is used first.

How does LIFO affect COGS in inflation?

Higher COGS, Lower Net Income. Newer, higher-cost inventory is used first.

What is the Lower-of-Cost-or-Market (LCM) Rule?

Inventory is reported at the lower of cost or market value on the balance sheet.

What is the Allowance for Doubtful Accounts?

A contra asset account used to estimate uncollectible accounts.

How do you calculate Net Realizable Value (NRV)?

Accounts Receivable - Allowance for Doubtful Accounts.

How do you calculate Interest Revenue on Notes Receivable?

Interest = Principal × Interest Rate × Time.

What happens when a company writes off an account receivable?

Decrease Accounts Receivable & Allowance for Doubtful Accounts, NRV remains the same.

How do you calculate Straight-Line Depreciation?

(Cost - Salvage Value) ÷ Useful Life.

What are Intangible Assets?

Non-physical assets like patents, trademarks, and goodwill.

What happens when you sell a long-term asset?

Gain = Cash Received > Book Value. Loss = Cash Received < Book Value.

What is a Multistep Income Statement?

An income statement that separates operating and non-operating activities, showing Gross Margin, Operating Income, and Net Income.

What is the difference between Retail Companies and Wholesale Companies?

Retail Companies sell directly to consumers. Wholesale Companies buy in bulk and sell to retailers.

What is the effect of Sales Returns & Allowances?

Decrease Revenue and Accounts Receivable. Increase Inventory and reduce COGS.

How are Purchase Returns & Allowances recorded?

Decrease Inventory and decrease Accounts Payable (if purchased on account). If purchased with cash, increase Cash instead.

What happens when a company offers a Sales Discount?

Revenue and Accounts Receivable decrease. Encourages early payment from customers.

How does Weighted-Average Costing work?

(Total Cost of Goods Available for Sale) ÷ (Total Units Available for Sale) = Weighted Average Cost per Unit.

When is the Specific Identification Method used?

For high-value, unique items like cars, jewelry, or artwork. Each item’s cost is tracked individually.

What is the Matching Concept in relation to bad debts?

Bad debt expense is recorded in the same period as the related sales revenue.

What is the Percent of Revenue Method for estimating uncollectible accounts?

Uncollectible Accounts Expense = Net Credit Sales × % Uncollectible.

How does a Credit Card Sale impact financial statements?

Increase Revenue (full sale price), Record Credit Card Expense (usually a percentage of the sale), Increase Accounts Receivable (net of the service fee).

What is the Accounts Receivable Turnover Ratio, and how is it calculated?

Measures how efficiently a company collects its receivables. AR Turnover = Sales ÷ Net Accounts Receivable.

What are Capital Expenditures?

Costs that improve or extend the life of a long-term asset. Recorded as assets (not expenses).

What are Revenue Expenditures?

Costs for regular maintenance and repairs. Recorded as expenses.

What is the formula for Book Value of an Asset?

Book Value = Cost - Accumulated Depreciation.

What is the Relative Market Value Method?

Used to allocate costs in a Basket Purchase (when multiple assets are bought for one price). Allocates cost based on each asset’s appraised value percentage.

What is the difference between Amortization and Depreciation?

Amortization applies to intangible assets. Depreciation applies to tangible assets.

How does the Lower-of-Cost-or-Market Rule (LCM) affect inventory valuation?

Inventory is reported at the lower of historical cost or current market (replacement) cost.