Chapter 4 - Accounting for Retail Businesses (Merchandising Businesses)

Comprehensive vocabulary flashcards covering merchandise operations, purchase and sales transactions, freight terms, financial statements, inventory shrinkage, and metric-based analysis from Chapter 4.

Operating Cycle

The repeating sequence of events in a retail business wherein cash is spent to purchase merchandise, merchandise is sold to customers, accounts receivable are recorded, and cash is collected from customers.

Cost of Goods Sold (COGS)

The cost of merchandise sold to customers during the accounting period, reported on the income statement as a deduction from sales to determine gross profit.

Merchandise Inventory

Merchandise on hand that has not yet been sold at the end of the accounting period, reported as a current asset on the balance sheet.

Working Capital

A measure of short-term liquidity calculated as current assets minus current liabilities ($\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$).

Total Sales

The total dollar amount charged to customers for merchandise sold, including both cash sales and sales made on account.

Sales Returns and Allowances

Reductions in sales revenue granted to customers for merchandise that is damaged or defective, either returned to the merchandising business or retained by the customer with a price allowance.

Sales Discounts

Cash discounts offered by a seller to customers to encourage early payment of amounts owed on an invoice within a specified discount period.

Net Sales

Gross or total sales minus sales returns and allowances and sales discounts ($\text{Net Sales} = \text{Total Sales} - \text{Sales Returns and Allowances} - \text{Sales Discounts}$).

Purchases Returns and Allowances

Reductions in merchandise cost granted to a merchandising business by a manufacturer or supplier for returned, damaged, or defective merchandise.

Purchases Discounts

Discounts received by a merchandising business (buyer) from sellers for paying invoices early within the designated discount period.

Merchandise Available for Sale

The total cost of goods ready for customer purchase during the period, calculated by adding beginning inventory to the net purchases and freight in ($\text{Beginning Inventory} + \text{Cost of Merchandise Purchased}$).

Credit Terms

The payment terms agreed upon between buyer and seller specifying the discount percentage, the discount period, and the final due date for the net invoice amount.

2/10, n/30

Credit terms stating that the buyer may deduct a $2\%$ discount if payment is made within $10$ days of the invoice date; otherwise, the net full amount is due within $30$ days.

Customer Refunds Payable

A liability account that reflects estimated or actual cash refunds and credit allowances owed to customers for returned or damaged merchandise.

Estimated Returns Inventory

A current asset account representing the cost of merchandise that a company expects will be returned by customers in subsequent periods.

FOB Shipping Point and FOB Destination

Freight terms governing freight payment and title passage: under FOB Shipping Point, the buyer pays freight and receives title at shipment; under FOB Destination, the seller pays freight and title transfers upon delivery.

FOB Shipping Point

A shipping term meaning 'free on board shipping point,' where title of goods passes to the buyer at the shipping point and the buyer pays the freight charges.

FOB Destination

A shipping term meaning 'free on board destination,' where title of goods passes to the buyer only after reaching destination and the seller pays the freight charges.

Selling Expenses

Operating expenses incurred directly in selling merchandise and marketing to customers, including sales salaries, advertising, delivery expense, and depreciation of store equipment.

Administrative Expenses

Operating expenses incurred in the administration and overall management of the business, such as office salaries, rent expense, office supplies, insurance, and depreciation of office equipment.

Operating Income

The excess of gross profit over total operating expenses ($\text{Gross Profit} - \text{Operating Expenses}$).

Multi-Step Income Statement

An income statement format that presents subtotals for gross profit ($\text{Sales} - \text{Cost of Goods Sold}$), operating income ($\text{Gross Profit} - \text{Operating Expenses}$), and other revenues and expenses before determining net income.

Single-Step Income Statement

An income statement format that totals all revenues together, totals all expenses together, and calculates net income in one subtraction ($\text{Total Revenues} - \text{Total Expenses}$).

Inventory Shrinkage

The loss of inventory resulting from theft, spoilage, or error, calculated as the recorded account balance of inventory minus the physical merchandise inventory determined by a physical count.

Gross Profit Percent

A profitability metric expressing gross profit relative to net sales, calculated as $\frac{\text{Gross Profit}}{\text{Net Sales}}$.

Markup Percent

A pricing metric measuring gross profit relative to the cost of merchandise sold, calculated as $\frac{\text{Gross Profit}}{\text{Cost of Merchandise Sold}}$.

Ratio of Sales to Assets

An efficiency metric measuring how effectively a company utilizes its assets to generate revenue, calculated as $\frac{\text{Net Sales}}{\text{Average Total Assets}}$.