Accounting Midterm 2

Inventory

Items a company intends to sell in the ordinary course of business

Manufacturing Inventory

Raw materials, work in process, finished goods

Merchandising Inventory

Wholesale and retail inventory

Cost of Goods Sold (COGS)

Cost of producing or purchasing goods sold during a period

Gross Margin

Sales revenue minus cost of goods sold

Multi-Step Income Statement

Income statement with multiple levels of profit

Operating Income

Gross profit minus operating expenses

Income Before Income Taxes

Operating income plus or minus non-operating items

Net Income

Income before taxes minus income tax expense

Specific Identification

Inventory method matching each unit with its actual cost

FIFO

Assumes first units purchased are the first units sold

LIFO

Assumes last units purchased are the first units sold

Weighted Average Cost

Each unit assigned the weighted average cost of inventory

FIFO Ending Inventory

Reflects most recent inventory costs

LIFO COGS

Reflects most recent inventory costs

LIFO Conformity Rule

LIFO used for tax reporting must be used for financial reporting

FIFO in Rising Prices

Higher inventory and higher gross profit

LIFO in Rising Prices

Lower gross profit and lower taxes

LIFO Reserve

Difference between FIFO and LIFO ending inventory

Perpetual Inventory System

Continuously updates inventory records

Periodic Inventory System

Inventory updated at period end using physical count

FOB Shipping Point

Buyer owns inventory when seller ships

FOB Destination

Buyer owns inventory when inventory arrives

Inventory Turnover Ratio

COGS divided by average inventory

Average Days in Inventory

365 divided by inventory turnover

Gross Profit Ratio

Gross profit divided by net sales

Tangible Assets

Physical long-term assets

Land

Tangible asset that is not depreciated

Land Improvements

Depreciated improvements to land

Buildings

Long-term tangible asset

Equipment

Long-term tangible asset used in operations

Intangible Assets

Non-physical long-term assets

Patents

Exclusive right to manufacture or use a process for 20 years

Copyrights

Exclusive rights to published works

Trademarks

Words or symbols identifying a product or company

Franchises

Rights to operate under a franchisor's name

Goodwill

Excess purchase price over fair value of net assets

Property Plant and Equipment

Recorded at cost plus expenditures to prepare for use

Basket Purchase

Multiple assets purchased for one price

Basket Purchase Allocation

Allocate cost based on relative fair values

Research and Development

Expensed when incurred

Depreciation

Allocation of asset cost over useful life

Useful Life

Estimated time asset provides benefit

Residual Value

Expected value at end of asset life

Straight-Line Depreciation

Equal depreciation expense each period

Accumulated Depreciation

Total depreciation recorded to date

Book Value

Cost minus accumulated depreciation

Amortization

Allocation of intangible asset cost

Definite Life Intangibles

Amortized over useful life

Indefinite Life Intangibles

Not amortized

Liability

Obligation to transfer economic benefits

Notes Payable

Written promise to repay borrowed money

Interest Formula

Principal multiplied by rate multiplied by time

Capital Structure

Mix of debt and equity financing

Debt Financing

Borrowing money from creditors

Equity Financing

Raising money from stockholders

Installment Notes

Loans repaid through periodic payments

Bond

Formal debt instrument issued to investors

Bond Principal

Amount repaid at maturity

Bond Interest

Semiannual interest payments

Bond Discount

Bonds issued below face value

Bond Premium

Bonds issued above face value

Debt to Equity Ratio

Total liabilities divided by stockholders equity

Times Interest Earned

Ability to cover interest expense

Stockholders Equity

Owners' claim on assets

Paid-in Capital

Amount invested by stockholders

Retained Earnings

Accumulated earnings not distributed

Treasury Stock

Company's repurchased shares

Authorized Shares

Maximum shares a company can issue

Issued Shares

Shares sold by the company

Outstanding Shares

Issued shares held by investors

Par Value

Legal capital per share

Additional Paid-in Capital

Amount received above par value

Cash Dividends

Distribution of earnings to stockholders

Declaration Date

Date dividends are announced

Record Date

Determines eligible shareholders

Payment Date

Date dividends are paid

Operating Cash Flows

Cash from core business activities

Investing Cash Flows

Cash from buying and selling assets

Financing Cash Flows

Cash from debt and equity transactions

Indirect Method

Starts cash flow statement with net income

Vertical Analysis

Each financial statement item as a percentage of a base

Horizontal Analysis

Comparison of financial data over time