Canvas Topic: Intro to Accounting Concepts (Chapter 1-3) - Vocabulary Flashcards

Core Concepts

  • Financial statements: Balance Sheet, Income Statement, Cash Flow Statement; end-year balances carry forward as beginning balances next year.
  • Statement categories:
    • Financing: raise/repay capital (e.g., issuing stock, issuing/buying back debt, paying dividends).
    • Investing: buying/selling long-term assets (PPE, intangibles) and other investments.
    • Operating: core business activities (revenues, expenses).
  • Basic equation: Assets = Liabilities + Equity
  • Inventory flow (perpetual system):
    • Beginning inventory + Purchases = Goods Available for Sale (GAS)
    • Gas − Cost of Goods Sold = Ending Inventory
    • Cost of Goods Sold (COGS) is the expense tied to revenue from sales.
  • Revenue recognition principle: revenue is recognized when earned; collections may occur later and impact assets/liquidity, not revenue timing.
  • Gross vs net figures:
    • Net Sales = Gross Sales − Returns/Allowances − Discounts
    • Gross Profit = Net Sales − COGS
  • Gross margin vs gross profit are often used interchangeably in practice; both sit above SG&A in income statements.
  • Cost allocations in inventory:
    • Costs capitalized into inventory include purchase price, freight-in, and other costs to bring inventory to sale-ready state.
    • Shipping out to customers (freight-out) is generally an SG&A/operating expense, not part of COGS.
  • Role of notes and internal reporting: many numbers (e.g., breakage, allocations) are disclosed in notes; internal reports may be more granular.

Inventory & Cost of Goods Sold (COGS)

  • Goods available for sale (GAS) concept:
    • GAS = BI + Purchases
    • Ending Inventory = Gas − COGS
  • Inventory systems:
    • Perpetual: COGS recognized with every sale; inventory updated continuously.
    • Periodic: COGS computed at period end; inventory updated less frequently.
  • FOB terms:
    • Who pays shipping affects whether shipping costs are capitalized in inventory (FOB shipping point) or expensed later (FOB destination).
  • Costs included in inventory:
    • All costs to prepare inventory for sale (purchase price, freight-in, processing, handling, etc.).
  • Returns and shrinkage:
    • Returns: reverse revenue and reverse COGS; restore inventory.
    • Shrinkage: physical count adjustment when actual inventory differs from book; expense typically recorded as part of COGS or as a separate shrinkage expense.
  • Net vs gross handling in purchases/sales:
    • Gross: record at list price and then adjust for discounts; you must still balance assets and equities.
    • Net: record at discounted/net amounts; need to adjust for any subsequent changes (discounts taken, returns).
  • Inventory metrics and terms:
    • Gross Margin / Gross Profit: Gross ext{ Profit} = Net ext{ Sales} - COGS
    • Inventory accounting anchors: beginning balance, purchases, COGS, ending balance.

Revenues, Discounts, and Receivables

  • Revenue recognition and AR: recognize revenue when earned; cash collections affect asset mix but not the timing of revenue.
  • Discounts and net sales (two common approaches):
    • Approach A (gross-then-discount): record revenue at gross amount; later adjust for discount and reduce AR accordingly if discount is taken.
    • Approach B (net start): record net revenue upfront; later adjustments for whether discount is taken may be unnecessary.
    • Net Sales formula: Net ext{ Sales} = Gross ext{ Sales} - Discounts - Returns/Allowances
  • Customer discounts (e.g., 2/10, net 30):
    • If paid within discount period, cash received is Gross − Discount; AR is reduced by the discount amount.
    • If not, full amount is collected within net period; adjust accordingly.
  • Journal entry patterns for sales on account:
    • Sale (on account): Debit Accounts Receivable, Credit Revenue; Debit COGS, Credit Inventory.
    • If discount is taken: adjust Receivable and Revenue accordingly and recognize discount as a reduction to net revenue or AR as appropriate.
  • Net sales impact on income statement: revenue line becomes Net Sales; subtract COGS to get gross profit; then subtract SG&A and other expenses to get Net Income.

Special Topics and Notes

  • Gift cards and breakage (Target example):
    • Gift card liability represents cash received before goods are redeemed.
    • Revenue is recognized upon redemption; a portion may become breakage revenue over time (estimated based on historical burn rate).
    • Breakage reduces the liability and increases revenue gradually if applicable.
  • Prepaid insurance and adjusting entries:
    • When paid, record as an asset: Prepaid Insurance.
    • Adjust at period end: expense for the portion used, reduce Prepaid Insurance; example rule: cost × (months used / 12).
  • Inventory capitalization and overhead allocation (managerial context):
    • Direct labor and direct costs can be capitalized into inventory if attributable to a product.
    • Overhead and some salaries can be allocated to products or treated as period costs depending on internal policies; not GAAP rules per se, but common practice.
  • Costs classification and terminology:
    • Product costs: costs capitalized into inventory (COGS when sold).
    • Period costs: SG&A and other expenses not tied to specific products.
  • Returns and discounts (practical guidance):
    • Always separate discount/return scenarios conceptually; practice problems often combine several events (sale, discount, return, shipping).
    • Use separate notes or sections to track discount-related entries and return-related entries to avoid confusion.

Journal Entry Templates (quick reference)

  • Issue common stock for cash:
    • Debit Cash, Credit Common Stock.
  • Purchase inventory with cash (permanent entry):
    • Debit Inventory, Credit Cash.
  • Purchase inventory on account:
    • Debit Inventory, Credit Accounts Payable.
  • Sell inventory on account (recognize revenue and COGS):
    • Debit Accounts Receivable, Credit Revenue.
    • Debit COGS, Credit Inventory.
  • Sell inventory for cash (no discount):
    • Debit Cash, Credit Revenue.
    • Debit COGS, Credit Inventory.
  • Shipping to customers (selling expense):
    • Debit Freight-out/Delivery Expense, Credit Cash.
  • Prepaid insurance adjustment (end of period):
    • Debit Insurance Expense, Credit Prepaid Insurance (amount = cost × months used / 12).
  • Gift card breakage (simplified):
    • Liability reduced progressively; recognize Breakage Revenue when estimable and likely to occur.

Quick Exam Strategy and Study Tips

  • Focus on the three core activities: Financing, Investing, Operating. Know examples of each.
  • Master the movement of inventory: BI + Purchases = GAS; COGS when sold; EI remains.
  • Understand gross vs net concepts: gross sales, discounts, returns/allowances; net sales and net income implications.
  • Know how discounts affect AR and revenue; be able to show both gross and net entry patterns.
  • Practice journal-entry templates for common events, then adapt to numbers in problems.
  • For exams: expect 20–25 multiple choice questions (quantitative) and 3–5 short answers; bring pencil and a non-programmable calculator.
  • Use a two-track study note: one for inventory/purchases/discounts (net vs gross), one for AR/AP and revenue recognition; then tie them with journal-entry patterns.
  • Conceptual clarity over memorization: focus on big-picture flows (cash vs accruals) and how each event affects the balance sheet and income statement.