Financial Accounting: Sales, Receivables, Inventory, and Long-Lived Assets

Comprehensive vocabulary flashcards covering revenue recognition, sales discounts, receivables and bad debts, cash controls, inventory cost flow assumptions, LCNRV valuation, and long-lived tangible and intangible assets.

FOB shipping point

A shipping term under which title and risks of ownership transfer to the buyer when goods are shipped, meaning the goods belong to the buyer once sent off.

FOB destination

A shipping term under which title and risks of ownership transfer on delivery, meaning the goods belong to the buyer once they arrive.

Sales discount

Also known as a cash discount; a price reduction granted to credit customers to encourage prompt payment, reported as a contra-revenue account.

2/10, n/30

Credit terms stating that a $2\%$ discount is granted if payment is made within $10\text{ days}$; otherwise, the full net amount is due within $30\text{ days}$.

Sales returns and allowances

A contra-revenue account accumulating refunds or price reductions granted to customers for damaged, defective, or unsatisfactory merchandise.

Credit card discount

The fee charged by a card company for processing credit card transactions, reported by the merchant as a selling, general, and administrative expense rather than a contra-revenue.

Cash

Currency or any financial instrument accepted by banks for deposit and immediate credit, including checking account balances, checks, and money orders.

Cash equivalents

Short-term, highly liquid investments with original maturities of $3\text{ months}$ or less that are readily convertible to cash with little risk of value change.

Accounts receivable

Receivables created by credit sales on an open account without a formal promissory note.

Notes receivable

A formal written promise to pay a specified principal amount on a definite maturity date, usually with a stated rate of interest.

Trade receivable

A receivable generated in the normal course of business from the sale of merchandise or delivery of services on credit.

Nontrade receivable

A receivable arising from transactions outside the normal sale of merchandise or services, such as loans to employees or officers.

Allowance method

A GAAP-required approach that estimates uncollectible accounts in the period of sale to adhere to the matching principle, using an adjusting entry to bad debt expense and a contra-asset account.

Bad debt expense

The operating expense resulting from estimated uncollectible accounts receivable, reported among selling, general, and administrative expenses on the income statement.

Allowance for doubtful accounts

A contra-asset account containing estimated uncollectible receivables, subtracted from gross accounts receivable to report accounts receivable at net realizable value.

Percentage of credit sales method

An income statement approach to estimating bad debts that directly calculates bad debt expense as an estimated percentage of total credit sales.

Aging of accounts receivable method

A balance sheet approach that calculates the desired ending balance of the allowance for doubtful accounts by grouping receivables into age categories and applying estimated loss percentages.

Receivables turnover ratio

A measure of credit and collection efficiency computed as $\text{Net sales} \div \text{Average net trade accounts receivable}$.

Average collection period

The average number of days required to collect receivables from credit customers, computed as $365 \div \text{Receivables turnover}$.

Merchandise inventory

Finished goods purchased and held for resale in the regular course of business without requiring additional manufacturing or processing.

Raw materials inventory

Tangible items acquired for processing into finished goods that are transferred to work in process when placed into production.

Work in process inventory

Goods currently in the manufacturing process that have received materials, labor, and overhead but are not yet complete.

Finished goods inventory

Manufactured products that have completed the production process and are ready for sale to customers.

Cost of goods sold (COGS)

The major expense representing the capitalized cost of inventory sold during the period, calculated as $\text{Beginning inventory} + \text{Purchases} - \text{Ending inventory}$.

Perpetual inventory system

An inventory tracking system in which every purchase and sale is recorded directly in the inventory account continuously, maintaining up-to-date inventory and cost of goods sold records.

Periodic inventory system

An inventory system that does not keep a continuous record of inventory during the period; ending inventory is determined by a physical count, and COGS is computed using the cost equation.

Specific identification method

An inventory costing method that tracks and matches the exact purchase cost to each specific item sold, suitable for unique or high-value items.

First-in, first-out (FIFO)

An inventory cost flow assumption that treats the oldest goods purchased as the first goods sold, leaving the most recent acquisition costs in ending inventory.

Last-in, first-out (LIFO)

An inventory cost flow assumption that treats the most recently acquired goods as the first goods sold, leaving the oldest costs in ending inventory.

Average cost method

An inventory costing method that assigns the weighted average unit cost of goods available for sale to both cost of goods sold and ending inventory.

LIFO conformity rule

A U.S. federal tax rule mandating that if a company chooses to use LIFO for its income tax return, it must also use LIFO for financial reporting.

Lower of cost or net realizable value (LCNRV)

A conservative valuation rule dictating that when inventory's net realizable value drops below its original cost, it must be written down to net realizable value.

Net realizable value (NRV)

The estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Inventory turnover ratio

An operational efficiency ratio computed as $\text{Cost of goods sold} \div \text{Average inventory}$, showing how many times a firm turns over its inventory per year.

LIFO reserve

The disclosed difference between inventory valued under FIFO and inventory valued under LIFO, reported in notes by companies utilizing LIFO.

Tangible assets

Long-lived operational assets possessing physical substance, including land, buildings, fixtures, machinery, and equipment.

Intangible assets

Long-lived productive assets lacking physical substance that confer legal or competitive rights, such as patents, copyrights, trademarks, franchises, and goodwill.

Natural resources

Productive long-lived assets extracted from the natural environment (e.g., mineral deposits, oil reserves, timber tracts) that are depleted as physically extracted.

Ordinary repairs and maintenance

Routine, recurring expenditures made to maintain an asset in normal operating condition for the current period, expensed as incurred on the income statement.

Improvements (capital expenditures)

Substantial, infrequent expenditures that lengthen an asset's useful life, enhance productivity, or boost capacity, capitalized by debiting the asset account.

Net book value

The carrying value of a long-lived asset on the balance sheet, calculated as $\text{Acquisition cost} - \text{Accumulated depreciation}$.

Straight-line depreciation method

A depreciation method allocating equal expense to each period over an asset's useful life, computed as $(\text{Cost} - \text{Residual value}) \div \text{Useful life}$.

Units-of-production depreciation method

A depreciation method that determines expense based on actual asset usage or output during the period relative to estimated total lifetime output.

Double-declining-balance depreciation method

An accelerated depreciation method applying twice the straight-line rate to the asset's declining beginning net book value: $(\text{Cost} - \text{Accumulated depreciation}) \times \frac{2}{\text{Useful life}}$.

Asset impairment

The condition occurring when an asset's estimated future cash flows fall below its carrying value, triggering a write-down to fair value through an impairment loss.

Goodwill

An intangible asset representing the excess purchase price paid in a business combination over the fair market value of the identifiable net assets acquired.

Fixed asset turnover ratio

A measure of efficiency in utilizing fixed productive assets, calculated as $\text{Net sales} \div \text{Average net fixed assets}$.

Leasehold improvements

Enhancements and additions made to leased property that are capitalized as intangible assets and amortized over the lease term or useful life, whichever is shorter.