Finance

Contra revenue account

An account that is offset against a revenue account on the income statement.

Cost of goods sold

The total cost of merchandise sold during the period.

FOB destination

Freight terms indicating that the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight.

FOB shipping point

Freight terms indicating that the seller places goods free on board the carrier, and the buyer pays the freight costs.

Gross profit

The excess of net sales over the cost of goods sold.

Gross profit rate

Gross profit expressed as a percentage, calculated by dividing the amount of gross profit by net sales.

Income from operations

Income from a company’s principal operating activity, determined by subtracting operating expenses from gross profit.

Inventory

The merchandise that companies buy and sell to customers.

Multiple-step income statement

An income statement that shows several steps in determining net income.

Net sales

Sales revenue less sales returns and allowances and sales discounts.

Nonoperating activities

Various revenues, expenses, gains, and losses that are unrelated to a company’s main line of operations.

Operating expenses

Expenses incurred in the process of earning sales revenue.

Other expenses and losses

A nonoperating-activities section of the income statement that shows expenses and losses unrelated to the company’s main line of operations.

Other revenues and gains

A nonoperating-activities section of the income statement that shows revenues and gains unrelated to the company’s main line of operations.

Periodic inventory system

An inventory system under which the company does not keep detailed inventory records in the Inventory account throughout the accounting period but determines the cost of goods sold only at the end of an accounting period.

Perpetual inventory system

An inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale in the Inventory account, and the records continuously show the inventory that should be on hand.

Purchase allowance

A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise.

Purchase discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Purchase invoice

A document that supports each credit purchase.

Purchase return

A return of goods from the buyer to the seller for a cash or credit refund.

Sales discount

A reduction given by a seller for prompt payment of a credit sale.

Sales invoice

A document that supports each credit sale.

Sales returns and allowances

Purchase returns and allowances from the seller’s perspective.

Sales revenue (Sales)

The primary source of revenue in a merchandising company.

Single-step income statement

An income statement that shows only one step in determining net income.

Average-cost method

Inventory costing method that uses the weighted-average unit cost to allocate to ending inventory and cost of goods sold.

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party.

Consistency concept

Dictates that a company use the same accounting principles and methods from year to year.

Days in inventory

Measure of the average number of days inventory is held.

Finished goods inventory

Manufactured items that are completed and ready for sale.

First-in, first-out (FIFO) method

Inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.

Gross profit method

A method for estimating the cost of the ending inventory by applying a gross profit rate to net sales.

Inventory turnover

A ratio that measures the number of times on average the inventory sold during the period.

Just-in-time (JIT) inventory

Inventory system in which companies manufacture or purchase goods only when needed for use.

Last-in, first-out (LIFO) method

Inventory costing method that assumes the costs of the latest units purchased are the first to be allocated to cost of goods sold.

Lower-of-cost-or-net realizable value (LCNRV)

A basis whereby inventory is stated at the lower of either its cost or its net realizable value.

Moving-average method

Inventory costing method in which a new weighted-average unit cost is computed after each purchase.

Net realizable value

Net amount that a company expects to realize from the sale of inventory.

Raw materials

Basic goods that will be used in production but have not yet been placed into production.

Retail inventory method

A method for estimating the cost of the ending inventory by applying a cost-to-retail ratio.

Specific identification method

An actual physical flow costing method in which items still in inventory are specifically tracked.

Weighted-average unit cost

Average cost that is weighted by the number of units purchased at each unit cost.

Work in process

That portion of manufactured inventory that has been placed into the production process but is not yet complete.

Bank reconciliation

The process of comparing the bank’s balance with the company’s balance.

Bank statement

A monthly statement from the bank that shows the depositor’s bank transactions.

Bonding

Obtaining insurance protection against theft by employees.

Cash

Resources that consist of coins, currency, checks, money orders, and money on hand.

Cash equivalents

Short-term, highly liquid investments that can be converted to a specific amount of cash.

Check

A written order signed by a bank depositor, directing the bank to pay a specified sum to a designated recipient.

Committee on Sponsoring Organizations (COSO)

An initiative among five leading accounting and finance organizations for risk management and fraud deterrence.

Deposits in transit

Deposits recorded by the depositor but not yet recorded by the bank.

Electronic funds transfer (EFT)

A disbursement system that uses technology to transfer funds.

Fraud

A dishonest act by an employee for personal benefit at a cost to the employer.

Fraud triangle

The three factors contributing to fraudulent activity: opportunity, financial pressure, and rationalization.

Internal auditors

Company employees who evaluate the effectiveness of the company’s internal controls.

Internal control

A process to provide reasonable assurance regarding the achievement of company objectives.

NSF check

A check that is not paid by a bank due to insufficient funds.

Outstanding checks

Checks issued and recorded but not yet paid by the bank.

Petty cash fund

A cash fund used for small expenses.

Restricted cash

Cash designated for a special purpose.

Sarbanes-Oxley Act (SOX)

Regulations to reduce unethical corporate behavior.

Voucher

An authorization form prepared for each payment in a voucher system.

Voucher system

A network of approvals to ensure all disbursements by check are proper.

Accounts receivable

Amounts owed by customers on account.

Accounts receivable turnover

Liquidity measure of accounts receivable, calculated by dividing net credit sales by average net accounts receivable.

Aging the accounts receivable

Analyzing receivable balances by the time unpaid.

Allowance method

A GAAP method estimating uncollectible accounts at period end.

Average collection period

Average time a receivable is outstanding.

Bad Debt Expense

An expense account for uncollectible receivables.

Cash (net) realizable value

The net amount a company expects to receive in cash.

Concentration of credit risk

The threat of nonpayment from a large customer or class of customers.

Direct write-off method

A non-GAAP method for uncollectibles expensing as determined uncollectible.

Dishonored (defaulted) note

A note that is not paid in full at maturity.

Factor

A finance company that buys receivables and collects payments.

Maker

The party in a promissory note who promises to pay.

Notes receivable

Written promise for amounts to be received.

Other receivables

Various forms of nontrade receivables.

Payee

The party to whom payment of a promissory note is made.

Percentage-of-receivables basis

Method estimating the percentage of receivables resulting in losses.

Promissory note

A written promise to pay a specified amount on demand or at a certain time.

Receivables

Amounts due from individuals and other companies.

Trade receivables

Notes and accounts receivable from sales transactions.

net sales formula

net sales= sales revenue-sales returns and allowances

gross profit formula

gross profit= net sales-cogs

income from operations formula

income from operations= gross profit-operating expenses

gross profit rate formula

gross profit rate=gross profit/net sales x 100