Accounting Study Guide: Merchandising, Inventory Valuation, Financial Statements & Closing Process

Vocabulary flashcards covering merchandising operations, inventory costing methods, account classifications, journal entries, and the closing process.

Net Sales

The revenue generated by sales after deductions, calculated as: $\text{Net Sales} = \text{Sales Revenue} - \text{Sales Discounts} - \text{Sales Returns \& Allowances}$.

Gross Profit

The profit a company makes after deducting the costs associated with producing and selling its products, calculated as: $\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold (COGS)}$.

Goods Available for Sale

The total merchandise inventory that a business has ready to sell during an accounting period, calculated as: $\text{Goods Available for Sale} = \text{Beginning Inventory} + \text{Net Cost of Purchases}$.

Ending Inventory (Formula)

The value of merchandise on hand at the end of an accounting period, calculated as: $\text{Ending Inventory} = \text{Goods Available for Sale} - \text{COGS}$.

FOB Shipping Point

A shipping term where ownership transfers when goods are placed on the carrier at the shipping point; the buyer owns the goods while in transit and pays freight (Freight-In).

FOB Destination

A shipping term where ownership transfers when goods reach the buyer's location; the seller owns the goods while in transit and pays freight (Freight-Out).

Perpetual System

An inventory system that continuously updates inventory records with every purchase and sale, requiring two journal entries per sale: (1) Record Sale, and (2) Record Cost of Goods Sold.

Periodic System

An inventory system that updates inventory and Cost of Goods Sold (COGS) only at period-end via a physical count.

FIFO (First-In, First-Out)

An inventory cost flow assumption that assigns the oldest costs to Cost of Goods Sold first, while ending inventory reflects the most recent purchases. During rising costs (inflation), it produces lower COGS, higher Net Income, and higher ending inventory (current costs).

LIFO (Last-In, First-Out)

An inventory cost flow assumption that assigns the newest (most recent) costs to Cost of Goods Sold first, while ending inventory reflects the oldest costs. During rising costs (inflation), it produces higher COGS, lower Net Income (tax advantage), and lower ending inventory.

Weighted Average

An inventory costing method calculating the average cost per unit available for sale as $\frac{\text{Total Cost of Goods Available}}{\text{Total Units Available}}$. Its results for COGS, Net Income, and Ending Inventory fall smoothly between the FIFO and LIFO methods.

Specific Identification

An inventory costing method that tracks the exact actual cost of each individual item sold. Typically used for unique, high-value items (such as cars and jewelry), it matches physical flow exactly and is unaffected by cost sequence assumptions.

Lower of Cost or Net Realizable Value (LCNRV)

An inventory valuation rule requiring inventory to be written down when its net realizable value (market value) falls below its original historical cost, adhering to the conservatism principle.

Temporary (Nominal) Accounts

Accounts that are closed at period-end and have their balances reset to zero. They include Revenues, Expenses, Sales Discounts/Returns, Withdrawals/Dividends, and Income Summary.

Permanent (Real) Accounts

Accounts that are never closed and carry their balances forward into the next period. They include Assets, Liabilities, and Capital / Retained Earnings.

REID

The four-step acronym for the period-end closing process: (1) R - Revenue (close Revenue to Income Summary), (2) E - Expenses (close Expenses & Contra-Revenues to Income Summary), (3) I - Income Summary (close Income Summary balance to Capital/Retained Earnings), and (4) D - Drawings (close Owner Withdrawals directly to Capital).

Adjusting Entry for Shrinkage

The journal entry recorded when recorded inventory exceeds the physical count: Debit Cost of Goods Sold and Credit Merchandise Inventory.

Worksheet Steps

The five sequential steps of an accounting worksheet: (1) Enter Unadjusted Trial Balance, (2) Enter Adjustments, (3) Prepare Adjusted Trial Balance, (4) Sort balances into Financial Statement columns, and (5) Compute Net Income/Loss & total columns.