ACC240 Chapter 6

Vocabulary flashcards covering merchandising operations, inventory accounting systems, credit terms, shipping points, and the multistep income statement.

Operating Cycle

The time required for a business to invest cash into inventory or production, prepare the product for sale, sell it, and collect the cash to begin the process again.

Raw Materials

An inventory classification for manufacturing companies representing unprocessed materials that will go into the production process.

Work in Process

An inventory classification for manufacturing companies consisting of raw materials that have entered the manufacturing process and are being converted into finished goods.

Finished Goods

An inventory classification for manufacturing companies representing completely manufactured and assembled items ready for sale.

Periodic Inventory System

An inventory system where records are updated only twice per accounting period: when a physical count is taken at year-end, and at the start of the next period.

Perpetual Inventory System

An inventory system where accounting records are perpetually up to date because every purchase and sale is recorded immediately via scanning or entry.

Cost of Goods Available for Sale

The total cost of all merchandise that could be sold during an accounting period, calculated as beginning inventory plus net purchases ($\text{Beginning Inventory} + \text{Net Purchases}$).

Cost of Goods Sold (COGS)

An expense on the income statement representing the cost of merchandise sold to customers during the period, calculated as cost of goods available for sale minus ending inventory.

Credit Terms ($2/10,\,n/30$)

Payment terms granting the buyer a $2\%$ discount if the bill is paid within $10\,\text{days}$; otherwise, the full net balance is due within $30\,\text{days}$.

Purchase Returns and Allowances

A temporary contra account credited when returning merchandise or receiving price adjustments from suppliers, allowing managers to monitor return trends before closing the account to inventory at year-end.

Purchase Allowance

A price reduction granted by a supplier when purchased merchandise has minor defects or damage that do not ruin its total utility, leaving the sale final.

FOB Shipping Point

A shipping term stating that title of goods transfers to the buyer once goods are on the loading dock ready for transport, making transportation costs the buyer's responsibility and part of inventory cost.

FOB Destination

A shipping term stating that title of goods transfers to the buyer only upon arrival at the destination; the seller pays freight and records it as a selling expense.

Sales Returns and Allowances

A contra sales account with a normal debit balance used to track merchandise returned by customers or price reductions granted to customers.

Sales Discounts

A contra revenue account debited to record early payment discounts granted to customers who pay within the discount period.

Gross Sales

Total recorded sales revenue before subtracting any customer returns, allowances, or early payment cash discounts.

Net Sales

Total sales revenue calculated as gross sales minus sales returns and allowances and sales discounts ($\text{Net Sales} = \text{Gross Sales} - \text{Sales Returns and Allowances} - \text{Sales Discounts}$).

Gross Margin (Gross Profit)

The profit remaining after deducting cost of goods sold from net sales ($\text{Gross Margin} = \text{Net Sales} - \text{Cost of Goods Sold}$), which covers remaining business expenses.

Operating Expenses

Expenses incurred in the normal, core operations of a business, including wages, rent, utilities, and advertising.

Operating Income

A subtotal on the multistep income statement calculated by subtracting operating expenses from gross profit, measuring repeatable income from core business operations.

Other Revenues and Expenses

Non-operating income statement items that are unrelated to primary business operations, such as interest expense and dividend revenue.

Inventory Shrinkage

The difference between recorded perpetual ending inventory and the physical inventory count, usually resulting from theft, breakage, or spoilage.

Common-Size Income Statement

A financial presentation where every line item is expressed as a percentage of net sales to facilitate comparisons across accounting periods or companies.