MGMT 212 Midterm 2 - Definitions

Accounts Receivable: The amount of money owed to a company by its customers for goods or services provided on credit.

Aging Method: A technique used to estimate uncollectible accounts receivable by categorizing them based on their age (how long they have been outstanding).

Allowance for Doubtful Accounts: A contra-asset account that represents the estimated amount of accounts receivable that are expected to be uncollectible.

Amortization: The process of systematically allocating the cost of an intangible asset over its useful life.

Basket Purchase: The acquisition of multiple assets as a group in a single transaction.

Capitalize: To record an expenditure as an asset on the balance sheet, rather than expensing it immediately.

Cash Equivalents: Short-term, highly liquid investments that are readily convertible to cash and have original maturities of three months or less.

Contra Asset Account: An account that reduces the balance of another asset account.

Cost of Goods Sold: The direct costs associated with producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good.

Depreciation: The systematic allocation of the cost of a tangible asset over its useful life.

Direct Write-Off Method: A method of accounting for bad debts in which uncollectible accounts are written off directly as they are identified. Not GAAP.

Double-Declining Balance Method: An accelerated depreciation method that depreciates an asset at twice the rate of the straight-line method.

FIFO: Stands for “First-In, First-Out.” An inventory costing method that assumes the oldest inventory items are sold first.

FOB Destination: A shipping term indicating that the seller bears the shipping costs and retains ownership of the goods until they reach the buyer's destination.

FOB Shipping Point: A shipping term indicating that the buyer bears the shipping costs and takes ownership of the goods once they leave the seller's shipping point.

Goodwill: An intangible asset that represents the excess of the purchase price of a company over the fair value of its identifiable net assets.

Gross Profit: Revenue minus cost of goods sold.

Historical Cost: The original purchase price of an asset, plus any costs necessary to prepare it for use.

Impairment: A significant decline in the value of an asset below its carrying amount.

Intangible Assets: Assets that lack physical substance, such as patents, copyrights, and goodwill.

Inventory: Goods held for sale in the ordinary course of business or used in the production of goods to be sold.

Inventory Turnover: A ratio that measures how quickly a company sells its inventory. Calculated as Cost of Goods Sold / Average Inventory.

LIFO: Stands for “Last-In, First Out.” An inventory costing method that assumes the most recent inventory items are sold first.

Lower of Cost or Market (LCM): An inventory valuation method that requires inventory to be reported at the lower of its cost or its market value.

Net Realizable Value (NRV): The estimated selling price of an asset, less any estimated costs of completion, disposal, and transportation.

Notes Receivable: A formal written promise from a borrower to pay a specific sum of money to the lender at a specific date in the future.

Operating Income: Gross profit less operating expenses.

Patents: Exclusive rights granted for an invention, which allows the patent holder to exclude others from making, using, or selling the invention.

Percentage of Credit Sales Method: A method for estimating uncollectible accounts based on a percentage of credit sales.

Periodic Inventory System: An inventory system that updates inventory balances at the end of an accounting period, based on a physical count.

Perpetual Inventory System: An inventory system that continuously updates inventory balances for each purchase and sale.

Profit Margin: A profitability ratio that measures the percentage of sales that result in net income. Calculated as Net Income / Net Sales.

Property, Plant, and Equipment (PPE): Tangible assets that are used in a company's operations, such as land, buildings, and equipment.

Return on Assets (ROA): A profitability ratio that measures how efficiently a company uses its assets to generate profit. Calculated as Net Income / Average Total Assets.

Salvage Value: The estimated residual value of an asset at the end of its useful life.

Sales Allowances: A reduction in the selling price granted to a customer due to a defect in the goods or services.

Sales Discounts: A reduction in the selling price offered to customers for paying their invoices within a specified time period.

Sales Returns: Merchandise returned by a customer for a refund or credit.

Specific Identification Method: An inventory costing method that matches each unit of inventory with its actual cost.

Straight-Line Method: A depreciation method that allocates an equal amount of depreciation expense over each year of the asset's useful life.

Tangible Assets: Assets that have a physical form, such as land, buildings, and equipment.

Trade Discounts: A reduction in the list price offered to certain types of customers, such as wholesalers or retailers.

Trademarks: Distinctive signs or indicators that identify a company or its products and services.

Units of Production Method: A depreciation method that allocates depreciation expense based on the asset's usage, rather than time.

Weighted-Average Method: An inventory costing method that averages the cost of all inventory items available for sale.