accounting test 2 vocal Flashcards
purchase return
A situation in which sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable
sales return
A reduction in the amount owed by a customer due to the return of merchandise
perpetual inventory system
An inventory system that keeps a running computerized record of merchandise inventory
gross profit percentage
Measures the profitability of each sales dollar above the cost of goods sold. Gross profit / Net sales revenue
freight in
The transportation cost to ship goods to the purchaser’s warehouse; therefore, it is freight on purchased goods
single-step income statement
Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.
operating expenses
Expenses, other than Cost of Goods Sold, that are incurred in the entity’s major ongoing operations
fob destination
Situation in which the buyer takes ownership (title) to the goods at the delivery destination point and the seller typically pays the freight
credit terms
The payment terms of purchase or sale as stated on the invoice
merchandise inventory
The merchandise that a business sells to customers
other income and expenses
Revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense
sales allowance
A reduction in the amount owed by a customer that does not involve the return of merchandise inventory
refunds payable
A liability account used to estimate the amount of refunds that will be paid to customers in the future.
operating income
Measures the results of the entity’s major ongoing activities. Gross profit minus operating expenses
freight out
The transportation cost to ship goods out of the seller’s warehouse; therefore, it is freight on goods sold to a customer
sales discounts
reduction in the amount of revenue earned on sales for early payment
income tax expense
expense incurred by a corporation related to federal and state income taxes
cost of goods sold (COGS)
the cost of the merchandise inventory that the business has sold to customers
purchase discount
a discount that businesses offer to purchasers as an incentive for early payment
wholesaler
A type of merchandiser that buys goods from manufacturers and then sells them to retailers
inventory shrinkage
The loss of inventory that occurs because of theft and damage
retailer
A type of merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers
purchase allowance
An amount granted to the purchaser as an incentive to keep goods that are not “as ordered”
periodic inventory system
An inventory system that requires businesses to obtain a physical count of inventory to determine quantities on hand
selling expenses
operating expenses related to marketing and selling the company’s goods and services
estimated returns inventory
an asset account used to estimate the cost of merchandise inventory a company will receive in returns
fob shipping point
Situation in which the buyer takes ownership (title) to the goods after the goods leave the seller’s place of business (shipping point) and the buyer typically pays the freight
gross profit
excess of net sales revenue over cost of goods sold
merchandiser
A business that sells merchandise, or goods, to customers
invoice
A seller’s request for payment from the purchaser
vendor
The individual or business from whom a company purchases goods
Multi-Step Income Statement
Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income
sales revenue
The amount that a merchandiser earns from selling its inventory
administrative expenses
Operating expenses incurred that are not related to marketing the company’s goods and services
consistency principle
A business should use the same accounting methods and procedures from period to period
cost of goods available for sale
The total cost spent on inventory that was available to be sold during a period
conservatism
A business should report the least favorable figures in the financial statements when two or more possible options are presented
lower of cost or market rule (LCM)
Rule that merchandise inventory should be reported in the financial statements at whichever is lowerits historical cost or its market value
days’ sales in inventory
Measures the average number of days that inventory is held by a company. 365 days / Inventory turnover
specific identification method
An inventory costing method based on the specific cost of particular units of inventory
inventory costing method
A method of approximating the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory.
last in, first out, (LIFO) method
An inventory costing method in which the last costs into inventory are the first costs out to cost of goods sold. The method leaves the oldest coststhose of beginning inventory and the earliest purchases of the periodin ending inventory.
materiality concept
A company must perform strictly proper accounting only for items that are significant to the business’s financial situation
weighted-average method
An inventory costing method based on the weighted-average cost per unit of inventory that is calculated after each purchase. Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available
disclosure principle
a business financial statements must report enough information for outsiders to make knowledgeable decisions about the company
inventory turnover
Measures the number of times a company sells its average level of merchandise inventory during a period. Cost of goods sold / Average merchandise inventory
first in, first out (FIFO) method
An inventory costing method in which the first costs into inventory are the first costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases.
sarbanes-oxely act (sox)
Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.
internal control
The organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.
committee of sponsoring organization (COSO)
A committee that provides thought leadership related to enterprise risk management, internal control, and fraud deterrence.
internal control report
A report by management describing its responsibility for and the adequacy of internal controls over financial reporting
public company
A company that sells its stock to the general public
internal auditor
An employee of the business who ensures the company’s employees are following company policies, that the company meets all legal requirements, and that operations are running efficiently
separation of duties
Dividing responsibilities between two or more people to limit fraud and promote the accuracy of accounting records.
external auditor
An outside accountant, completely independent of the business, who evaluates the controls to ensure that the financial statements are presented fairly, in accordance with GAAP
firewall
A device that enables members of a local network to access the network, while keeping nonmembers out of the network
encryption
Rearranging plain-text messages by a mathematical processthe primary method of achieving security in e-commerce
collusion
Two or more people working together to circumvent internal controls and defraud a company
remittance advice
An optional attachment to a check that tells the business the reason for the payment
lock-box system
A system in which customers send their checks to a post office box that belongs to a bank. A bank employee empties the box daily and records the deposits into the company’s bank account.
evaluated receipts settlement (ERS)
A procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order.
electronic data interchange (EDI)
A streamlined process that bypasses paper documents altogether. Computers of customers communicate directly with the computers of suppliers to automate routine business transactions
petty cash
A fund containing a small amount of cash that is used to pay for minor expenditures
imprest system
A way to account for petty cash by maintaining a constant balance in the petty cash account. At any time, cash plus petty cash tickets must total the amount allocated to the petty cash fund
signature card
A card that shows each authorized person’s signature for a bank account.
deposit ticket
A bank form that is completed by the customer and shows the amount of each deposit
check
A document that instructs a bank to pay the designated person or business a specified amount of money
maker
The party who issues the check.
payee
The individual or business to whom the check is paid
routing number
On a check, the 9-digit number that identifies the bank upon which the payment is drawn.
account number
On a check, the number that identifies the account upon which the payment is drawn.
electronic funds transfer (EFT)
A system that transfers cash by electronic communication rather than by paper documents
canceled checks
Physical or scanned copies of the maker’s cashed (paid) checks.
bank statement
A document from the bank that reports the activity in the customer’s account. It shows the bank account’s beginning and ending balances and lists the month’s cash transactions conducted through the bank account.
bank reconciliation
A document explaining the reasons for the difference between a depositor’s cash records and the depositor’s cash balance in its bank account
timing difference
Difference that arises between the balance on the bank statement and the balance on the company’s books because of a time lag in recording transactions
deposit in transit
a deposit recorded by the company but not yet by its bank
outstanding check
A check issued by a company and recorded on its books but not yet paid by its bank
credit memorandum
An increase in a bank account
debit memorandum
A decrease in a bank account.
non sufficient funds (NSF) check
A check for which the maker’s bank account has insufficient money to pay the check
cash ratio
A measure of a company’s ability to pay current liabilities from cash and cash equivalents: (Cash + Cash equivalents) / Total current liabilities
cash equivalent
A highly liquid investment that can be converted into cash in three months or less.
accounts receivable
The right to receive cash in the future from customers for goods sold or for services performed
receivable
A monetary claim against a business or an individual.
debtor
The party to a credit transaction who takes on an obligation/payable
notes receivable
A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future
maturity date
The date when a note is due
bad debts expense
The cost to the seller of extending credit. It arises from the failure to collect from some credit customers
direct write-off method
A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer’s account receivable is uncollectible
allowance for bad debt
A contra asset account, related to accounts receivable, that holds the estimated amount of uncollectible accounts.
allowance method
A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from
net realizable value
The net value a company expects to collect from its accounts receivable. Accounts Receivable less Allowance for Bad Debts
aging-of-receivables method
A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on the age of individual accounts receivable
percent-of-sales method
A method of estimating uncollectible receivables that calculates bad debts expense based on a percentage of net credit sales.
percent-of-receivable method
A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on a percentage of accounts receivable.
principal
The amount loaned by the payee and borrowed by the maker of the note
interest
The revenue to the payee for loaning moneythe expense to the debtor.
interest period
The period of time during which interest is computed. It extends from the original date of the note to the maturity date
interest rate
The percentage rate of interest specified by the note.
maturity value
The sum of the principal plus interest due at maturity
dishonor a note
Failure of a note’s maker to pay a note receivable at maturity.
acid-test ratio
The ratio of the sum of cash, cash equivalents, short-term investments, and net current receivables to total current liabilities. The ratio tells whether the entity could pay all its current liabilities if they came due immediately. (Cash including cash equivalents + Short-term investments + Net current receivables) / Total current liabilities
accounts receivable turnover rate
A ratio that measures the number of times the company collects the average accounts receivable balance in a year. Net credit sales / Average net accounts receivable.
days’ sales in receivables
The ratio of average net accounts receivable to one day’s sales. The ratio tells how many days it takes to collect the average level of accounts receivable. 365 days / Accounts receivable turnover ratio.
