Financial Accounting Exam 2 Review

Vocabulary practice flashcards covering key financial accounting concepts from Exam 2 Review, including accounts receivable, revenue and discounts, inventory costing methods, long-term assets and depreciation, and liabilities.

Allowance for Doubtful Accounts (AFDA)

A contra-asset account with a normal credit balance that offsets gross Accounts Receivable to report receivables at their estimated net realizable value.

Allowance Method

The bad debt estimation method required under US GAAP for public companies, which estimates uncollectible accounts and matches bad debt expense to the period in which credit sales occur.

Write-off of Accounts Receivable

A journal entry that removes a specific customer's uncollectible account by debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable; it does not impact the net realizable value of Accounts Receivable.

Aging Method

A balance-sheet approach to estimating bad debt expense that categorizes outstanding accounts receivable by the number of days overdue and applies increasing estimated uncollectible percentages to older balances.

Credit Card Discount

A contra-revenue account that records the fee percentage charged by a credit card processor and deducted from the merchant's gross sales receipts.

Trade Discount

A price reduction offered off the list price at the time of sale; it directly impacts gross sales because the transaction is recorded net of the discount without establishing a separate ledger discount account.

Sales Discount

A cash discount offered to credit customers to encourage prompt payment within a specified discount period; it is recorded in a contra-revenue account and directly impacts net sales.

Net Sales

The net revenue reported on the income statement, calculated as: $\text{Net Sales} = \text{Gross Sales} - \text{Sales Discounts} - \text{Sales Returns and Allowances} - \text{Credit Card Discounts}$.

Sales Returns and Allowances

A contra-revenue account used to record customer merchandise returns for a refund or price reductions granted to customers for damaged or unsatisfactory goods.

Perpetual Inventory System

An inventory system in which inventory records and Cost of Goods Sold ($\text{COGS}$) are continuously updated at the point of every sale.

Periodic Inventory System

An inventory system where Cost of Goods Sold ($\text{COGS}$) and ending inventory balances are not updated at each sale, but are calculated at the end of the accounting period following a physical inventory count.

First-In, First-Out (FIFO)

An inventory cost flow assumption that treats the oldest inventory costs as the first to be sold; when inventory prices are falling over time, FIFO produces a higher Cost of Goods Sold ($\text{COGS}$) than LIFO.

Last-In, First-Out (LIFO)

An inventory cost flow assumption that assigns the cost of the most recently acquired goods to Cost of Goods Sold ($\text{COGS}$); when inventory prices are falling over time, LIFO produces a lower Cost of Goods Sold than FIFO.

Lower of Cost and Net Realizable Value (LCNRV)

The inventory accounting rule requiring inventory to be written down when its market value falls below its historical cost, recorded with a debit to Cost of Goods Sold and a credit to Inventory.

Double-Declining Balance (DDB) Method

An accelerated depreciation method where the periodic expense is determined by multiplying the declining book value by twice the straight-line rate: $\left[\frac{\text{Cost} - \text{Accumulated Depreciation}}{\text{Useful Life}}\right] \times 2$.

Goodwill

An unidentifiable intangible asset recognized when one company acquires another, representing the excess of the purchase price paid over the fair market value of the acquiree's net identifiable assets.

Straight-Line Depreciation

A depreciation method that allocates an equal amount of expense to each year of an asset's useful life using the formula: $\frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$.

Units-of-Production Depreciation

A depreciation method that allocates depreciable asset cost based on the asset's actual productive output or usage during the period rather than the passage of time.

Net Book Value (NBV)

The carrying value of a long-term asset reported on the balance sheet, calculated as the asset's historical acquisition cost minus its accumulated depreciation.

Capital Expenditure

An expenditure that improves an existing asset, increases its efficiency, or extends its useful life (such as an engine replacement), which is added to the asset's book value rather than expensed immediately.

Present Value

The current monetary value of a future sum of money or stream of cash flows discounted at a specified interest rate; the valuation basis at which long-term liabilities are reported on financial statements.

Contingent Liability

A potential obligation arising from past events (such as an ongoing lawsuit) that must be recorded as an accrued liability on the balance sheet when payment is probable and the amount can be reasonably estimated.

Non-Interest-Bearing Note

A promissory note that does not require separate periodic interest payments and is issued at a discount below its stated face value.

Installment Note

A long-term loan agreement requiring equal periodic payments, where each individual payment is divided into a principal reduction and interest expense.

Periodic Weighted Average Cost Method

An inventory valuation method that divides the total cost of goods available for sale by the total number of units available for sale during the period to establish an average unit cost applied to both Cost of Goods Sold and ending inventory.