Accounting Chapters 5 & 6 Practice Flashcards

A set of vocabulary flashcards based on lecture practice questions covering revenue recognition, accounts receivable, the allowance method, and inventory ratios.

Revenue Recognition Timing

The principle that revenue should be recorded when the product ships to the customer (e.g., January 2027) even if payment was received in a previous period (e.g., December 2026).

Gross Revenue

The total amount of a sale recognized at the time of the transaction before any credit terms or discounts are applied.

Net Revenue

The amount calculated by subtracting sales discounts from gross sales once payment is received within the discount period.

Accounts Receivable

Assets of the company representing the amount owed by customers for goods or services provided.

Allowance Method

An accounting method for uncollectible accounts required by GAAP that reports net accounts receivable for the amount of cash expected to be collected.

Allowance for Uncollectible Accounts

A contra-asset account that increases when a company estimates future uncollectible accounts at the end of the year.

Write-off of Accounts Receivable

The process under the allowance method that decreases the Allowance for Uncollectible Accounts and has no effect on net income or total assets at the time of the action.

Bad Debt Expense

The income statement account used to report the estimated cost of credit sales that will not be collected; calculated as the difference between the required ending balance in the allowance account and its current balance.

Receivables Turnover Ratio

A measure of how efficiently a company collects its receivables, calculated as $\frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}$.

Inventory Sellers

Types of businesses, specifically manufacturing and merchandising companies, that report revenues by selling physical product inventory.

Gross Profit

A level of profitability in a multiple-step income statement representing revenues from the sale of inventory less the cost of that inventory.

Purchase of Inventory on Account

A transaction that results in an increase to the Inventory asset and an increase to the Accounts Payable liability.

Sale of Inventory on Account

A transaction that increases Accounts Receivable and Sales Revenue while simultaneously increasing Cost of Goods Sold and decreasing Inventory.

Inventory Turnover

A ratio indicating how many times inventory is sold during a period, calculated as $\frac{\text{Cost of Goods Sold}}{\text{Average Inventory}}$.

Average Days in Inventory

The approximate number of days it takes for a company to sell its inventory, calculated as $\frac{365}{\text{Inventory Turnover}}$.

Gross Profit Ratio

A percentage representing the margin on sales, calculated as $\frac{\text{Net Sales} - \text{Cost of Goods Sold}}{\text{Net Sales}}$.