Financial Accounting: Adjustments, Internal Controls, Merchandising Operations, and Inventory Costing

Comprehensive practice vocabulary flashcards covering accounting adjustments, closing entries, fraud concepts, internal control principles, cash handling, merchandising systems, inventory methods (FIFO, LIFO, Weighted Average), and inventory turnover ratios.

Adjustments

Entries made to the accounting records at the end of the accounting period to state assets, liabilities, revenues, and expenses at their appropriate amounts.

Deferral Adjustments

Adjustments used to decrease balance sheet accounts and increase corresponding income statement accounts when cash was received or paid in a prior period; each entry involves one asset and one expense account, or one liability and one revenue account.

Accrual Adjustments

Adjustments used to record revenues or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts; each entry involves one asset and one revenue account, or one liability and one expense account.

Depreciation

The process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method of allocation.

Contra-Account

An account that is an offset to, or reduction of, another related account, such as Accumulated Depreciation offsetting Equipment on the balance sheet.

Carrying Value (Book Value)

The net reported amount of a long-term asset on the balance sheet, calculated as the original cost minus accumulated depreciation.

Amortization

The systematic allocation of the cost of an intangible asset (such as software) over its estimated useful life.

Temporary Accounts

Accounts that track financial results for a limited period of time (revenues, expenses, and dividends) and are closed to Retained Earnings at the end of the accounting period.

Permanent Accounts

Accounts that track financial results from year to year and maintain cumulative balances, consisting of assets, liabilities, and stockholders' equity.

Post-Closing Trial Balance

The final internal report prepared in the accounting process to verify that total debits equal total credits and that all temporary accounts have zero balances, containing only permanent accounts.

Fraud

An attempt to deceive others for personal gain.

Corruption

A form of fraud in which an employee misuses their position for inappropriate personal gain.

Asset Misappropriation

A form of fraud involving the theft, embezzlement, or unauthorized taking of company property and resources.

Financial Statement Fraud

A form of fraud that involves misreporting amounts in financial statements to portray more favorable operating results.

The Fraud Triangle

A conceptual framework identifying the three elements present when fraud is committed: Incentive (the reason or need), Opportunity (weaknesses in internal control), and Rationalization (justification of the misdeed).

Sarbanes-Oxley Act (SOX)

A law passed by the U.S. Congress in 2002 to restore investor confidence after massive accounting scandals by counteracting incentives (stiff fines and prison terms), reducing opportunities (internal control evaluations and independent audit committees), and encouraging honesty (whistleblower protections and tip lines).

Internal Control

The set of actions and procedures taken by people at every level of an organization to achieve its objectives and assure workflows and accounting systems are efficient, reliable, and accurate.

Control Environment

The component of internal control referring to the overall tone and culture of an organization regarding ethical conduct and internal control compliance.

Risk Assessment

The component of internal control that requires an organization to continuously evaluate and identify potential areas of risk and vulnerability to fraud.

Control Activities

The actual policies, operational responsibilities, and specific procedures put in place within an organization to manage risk and protect assets.

Establish Responsibility

An internal control principle requiring that each specific task is assigned to only one individual so that errors or theft can be traced directly to that employee.

Segregation of Duties

An internal control principle that separates responsibilities for an entire process among multiple individuals to prevent fraud and ensure independent oversight.

Petty Cash Fund

A small amount of cash held on company premises in a locked cash box used to reimburse employees for small expenditures, deliveries, or minor purchases on behalf of the company.

Operating Cycle

The series of recurring activities that a company undertakes to generate revenues, including acquiring goods or providing services, selling them to customers, and collecting cash.

Inventory

A current asset account representing the total cost of acquiring goods that a merchandising company has purchased but has not yet sold.

Cost of Goods Sold (COGS)

The total cost incurred to acquire or manufacture all products that a merchandising company has sold to customers during the accounting period.

Gross Profit

The profit earned directly from merchandise sales before deducting operating expenses, calculated as Sales Revenue minus Cost of Goods Sold ($\text{Gross Profit} = \text{Sales Revenue} - \text{COGS}$).

Periodic Inventory System

An inventory tracking method that updates inventory records for purchases, sales, and returns only at the end of the accounting period based on a physical count.

Perpetual Inventory System

An inventory tracking method that continuously updates inventory and cost of goods sold records every time inventory is bought, sold, or returned.

Inventory Shrinkage

The loss of inventory due to theft, fraud, spoilage, or clerical error, identified by comparing recorded perpetual balances with an actual physical count.

FOB Shipping Point vs. FOB Destination

Shipping terms determining when title transfers: FOB Shipping Point transfers ownership and freight costs to the buyer once loaded for transit, whereas FOB Destination keeps ownership and shipping costs with the seller until delivery to the buyer.

Purchase Discounts

A cash discount offered by a vendor (such as $2/30, \, n/60$) that allows the buyer to reduce the amount owed if payment is completed within a stated early discount period.

Gross Profit Percentage

A profitability metric indicating the percentage of net sales remaining after deducting Cost of Goods Sold, calculated as $(\text{Gross Profit} / \text{Net Sales}) \times 100$.

Goods Available for Sale

The total cost of inventory available to be sold during an accounting period, calculated as Beginning Inventory plus Purchases ($\text{Beginning Inventory} + \text{Purchases}$).

Specific Identification Method

An inventory costing method that tracks and records the actual specific purchase cost of each individual unit sold in Cost of Goods Sold and each unsold unit in ending inventory.

First-In, First-Out (FIFO)

An inventory cost flow assumption that treats the oldest goods purchased as the first ones sold, allocating the most recent inventory costs to ending inventory.

Last-In, First-Out (LIFO)

An inventory cost flow assumption that treats the most recently purchased goods as the first ones sold, allocating the oldest purchase costs to ending inventory.

Weighted Average Cost Method

An inventory costing method that assigns unit costs based on the average cost of all goods available for sale, computed as $\frac{\text{Cost of Goods Available for Sale}}{\text{Total Units Available for Sale}}$.

Inventory Turnover Ratio

A financial ratio that measures how many times inventory is sold and replaced during a given period, calculated as $\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$.

Days to Sell

A metric that estimates the average number of days required to sell ending inventory, calculated as $\frac{365}{\text{Inventory Turnover Ratio}}$.