accounting 1 chapter 4,5,6

Merchandise

Goods that a company owns and expects to sell to customers; also called merchandise inventory or inventory

Merchandiser

Entity that earns income by buying and selling merchandise.

Wholesaler

Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.

Retailer

Intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

Cost of goods sold

Cost of inventory sold to customers during a period; also called cost of sales.

Computing income for merchandising company order

Net Sales minus Cost of goods sold = Gross profit minus expenses = net income

Gross profit

Net sales minus cost of goods sold; also called gross margin.

Gross margin

Net sales minus cost of goods sold; also called gross profit.

Inventory

Goods a company owns and expects to produce and/or sell in its normal operations.

Merchandiser Cost Flow

Net purchases + Beginning Inventory = Merchandise available for sale = Cost of goods sold + ending inventory

Perpetual inventory system

Method that maintains continuous records of the cost of inventory available and the cost of goods sold.

Periodic inventory system

Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available.

Credit terms

Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future.

Credit period

Time period that can pass before a customer's payment is due.

Cash discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.

Purchases discount

Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.

Sales discount

Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.

Discount period

Time period in which a cash discount is available and the buyer can make a reduced payment.

Gross method

Method of recording purchases at the full invoice price without deducting any cash discounts.

FOB

Abbreviation for free on board; the point when ownership of goods passes to the buyer; FOB shipping point (or factory) means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier; FOB destination means the seller pays shipping costs and the buyer accepts ownership of goods at the buyer's place of business.

Supplementary records

Information outside the usual accounting records; also called supplemental records.

Net method

Method of recording purchases at the full invoice price less any cash discounts.

Sales Returns and Allowances

Refunds or credits given to customers for unsatisfactory merchandise are recorded (debited) in Sales Returns and Allowances, a contra account to Sales. In addition, estimates of future sales returns and allowances (related to current-period sales) are made with an adjusting entry that debits Sales Returns and Allowances; this results in sales being recorded net of expected returns and allowances. Sales Returns and Allowances is a temporary account that is closed each period.

Shrinkage

Inventory losses that occur as a result of theft or deterioration.

Multiple-step income statement

Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses.

Selling expenses

Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers.

General and administrative expenses

Expenses that support the operating activities of a business.

Single-step income statement

Income statement format that subtracts total expenses, including cost of goods sold, from total revenues with no other subtotals.

Acid-test ratio

Ratio used to assess a company's ability to settle its current debts with its most liquid assets; defined as quick assets (cash, short-term investments, and current receivables) divided by current liabilities.

Gross margin ratio

Gross margin (net sales minus cost of goods sold) divided by net sales; also called gross profit ratio.

Consignor

Owner of goods held by another party who will sell them for the owner.

Consignee

Receiver of goods owned by another who holds them for purposes of selling them for the owner.

Net realizable value

Expected selling price (value) of an item minus the cost of making the sale.

Specific identification (SI)

Method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory.

First-in, first-out (FIFO)

Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.

Last-in, first-out (LIFO)

Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

Weighted average (WA)

Method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale, which is then multiplied by the units sold to yield the cost of that sale; also called average cost.

Lower of cost or market (LCM)

Required method to report inventory at market replacement cost when that market cost is lower than recorded cost.

Inventory turnover

Number of times a company's average inventory is sold during a period; computed by dividing cost of goods sold by average inventory; also called merchandise turnover.

Days' sales in inventory

Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365; also called days' stock on hand.

retail inventory method

Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.

Interim financial statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Discounts lost

Expenses resulting from not taking advantage of cash discounts on purchases.

Internal controls or internal control system

All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

Sarbanes-Oxley Act (SOX)

Legislation that created the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.

Committee of Sponsoring Organizations (COSO)

Committee of Sponsoring Organizations of the Treadway Commission (or COSO) is a joint initiative of five private sector organizations and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.

Principles of internal control

Principles prescribing management to establish responsibility, maintain records, insure assets, separate recordkeeping from custody of assets, divide responsibility for related transactions, apply technological controls, and perform reviews.

Blockchain

Technology used to create a secure ledger of transactions.

Liquidity

Availability of resources to meet short-term cash requirements.

Liquid assets

Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.

Cash

Includes currency, coins, and amounts on deposit in bank checking or savings accounts.

Cash equivalents

Short-term investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date (usually within 90 days) so that market value is not sensitive to interest rate changes.

Cash Over and Short

Income statement account used to record cash overages and cash shortages arising from errors in cash receipts or payments.

Voucher system

Procedures and approvals designed to control cash disbursements and acceptance of obligations.

Voucher

Internal file used to store documents and information to control cash disbursements and to ensure that a transaction is properly authorized and recorded.

Petty cash

Small amount of cash in a fund to pay minor expenses; accounted for using an imprest system.

Signature card

Includes the signature of each person authorized to sign checks on the bank account.

Deposit ticket

Lists items such as currency, coins, and checks deposited and their corresponding dollar amounts.

Check

Document signed by a depositor instructing the bank to pay a specified amount to a designated recipient.

Electronic funds transfer (EFT)

Use of electronic communication to transfer cash from one party to another.

Bank statement

Bank report on the depositor's beginning and ending cash balances, and a listing of its changes, for a period.

Canceled checks

Checks that the bank has paid and deducted from the depositor's account.

Bank reconciliation

Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement, for purposes of computing the adjusted cash balance.

Deposits in transit

Deposits recorded by the company but not yet recorded by its bank.

Outstanding checks

Checks written and recorded by the depositor but not yet paid by the bank at the bank statement date.

Days' sales uncollected

Measure of the liquidity of receivables, computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365; also called days' sales in receivables.

Purchase requisition

Document listing merchandise needed by a department and requesting it be purchased.

Purchase order

Document used by the purchasing department to place an order with a seller (vendor).

Vendor

Seller of goods or services.

Vendee

Receiving report

Form used to report that ordered goods were received and to describe their quantity and condition.

Invoice approval

Document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization.

Voucher register

Journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved.

Check register

Another name for a cash payments journal when the journal has a column for check numbers.