Acct 2301 Exam 2 Vocabulary Study Guide

Vocabulary and terminology flashcards covering Chapters 4, 5, and 6 for Accounting 2301 Exam 2.

Liquidity

The order in which assets and liabilities are organized on a classified balance sheet based on how quickly assets turn into cash or liabilities must be paid in cash.

Account Form

A balance sheet presentation layout where assets, liabilities, and equity are displayed side-by-side.

Report Form

A balance sheet presentation layout where assets, liabilities, and equity are stacked vertically over and under each other.

Current Assets

Assets consumed or turned into cash within one year, including cash, short-term investments, accounts receivable, inventory, and prepaid expenses.

Non-Current Assets

Assets used over multiple years, including property, plant & equipment (PP&E), intangibles (patents, trademarks), and other long-term assets.

Current Liabilities

Obligations due within one year, including accounts payable, accrued expenses, and short-term notes payable.

Long-Term Liabilities

Obligations due after one year, such as long-term notes payable.

Contributed Capital

Money contributed by owners into the business, including common stock, owner's equity, and partner capital.

Retained Earnings

Accumulated profits retained and kept in the business.

Accounting Equation

The foundational balance sheet formula: $\text{Assets} = \text{Liabilities} + \text{Equity}$.

Gross Margin

The profit earned selling products calculated as sales revenue minus Cost of Goods Sold (COGS).

Operating Expenses

Operational costs divided into selling expenses (sales team, marketing) plus general & administrative expenses (office, management).

Operating Income

Profit generated directly from primary business operations, calculated as gross margin minus operating expenses.

Current Ratio

A liquidity ratio calculated as $\text{Current assets} \text{ }\frac{}{}\text{ }\text{Current liabilities}$ to evaluate whether short-term obligations can be covered (benchmark $> 1$).

Debt to Assets Ratio

A solvency ratio calculated as $\text{Total liabilities} \text{ }\frac{}{}\text{ }\text{Total assets}$ to measure whether assets cover all liabilities (benchmark $< 1$).

Gross Margin Percentage

A profitability metric calculated as $\text{Gross margin} \text{ }\frac{}{}\text{ }\text{Sales}$.

Operating Income Percentage

A financial efficiency metric calculated as $\text{Operating income} \text{ }\frac{}{}\text{ }\text{Sales}$ where a benchmark of $> 10\%$ indicates a well-run business.

Merchandise Operating Cycle

The four-step operational sequence of a product firm: Purchase inventory, sell and ship goods, bill the customer, and collect payment.

Services Operating Cycle

The operational sequence of a service firm: Perform services, bill clients, pay employees, and collect payment.

Inventory Capitalization Rule

The requirement that all costs necessary to get inventory in place and available for sale—including inbound freight, tariffs, taxes, and import duties—must be debited to inventory.

Contra Account

An account classified alongside a main financial statement item that carries an opposite normal balance and acts as a direct deduction rather than an expense.

Sales Returns and Allowances

A contra account classified with revenue that has a normal debit balance, acting as a deduction from gross sales revenue so management can track returns separately.

FIFO (First-In, First-Out)

An inventory costing method assuming the oldest units are sold first, resulting in higher ending inventory, lower COGS, and higher net income during periods of rising prices.

Weighted Average Method

An inventory costing method that recomputes a rolling average unit cost upon every purchase and removes inventory at that current average cost during sales.

Credit Memo

A document issued by a supplier following a purchase return that reduces the balance owed in accounts payable.