Ch. 5: A Trading Business Flashcards
Cash Discount
A reduction in price offered by a seller to a buyer as an incentive to pay the obligation to the seller before the buyer is actually required to do so.
Merchandise Inventory
Goods on hand at the end of an accounting period. The value of the inventory is determined by taking a physical inventory of goods previously purchased but not sold during the current accounting period. The ending inventory becomes the beginning merchandise inventory at the beginning of the new accounting period.
Sales Discount
A reduction of sales price offered by a seller to a buyer. The difference between the amount owed by the customer and the amount of cash received is known as the sales discount.
Terms
The means or method of payment of an obligation. Terms are established by the seller and are included on the invoice.
Credit Memorandum
A document granting permission for the buyer to return goods to the seller. The effect of the credit memorandum is to reduce the obligation of the buyer by crediting the account receivable. If the goods were paid for before their return, the buyer receives a refund.
Discount
(1) A reduction in price offered by a seller to a buyer. (2) A term describing the sale of stock at a price lower than par.
F.O.B. Destination
F.O.B. refers to “Free On Board,” which indicates that the seller is responsible for the delivery charges to the destination of the shipment. Since the destination is the end of the process, the seller bears the cost of the delivery charges. If the goods are being shipped from New York to Chicago, the invoice would state, “F.O.B. Chicago.” The freight charges paid by the seller are charged to an account entitled “Freight on Sales” and represent an expense directly related to the sale of the product.
F.O.B. Shipping Point
F.O.B. refers to “Free On Board,” which indicates that the seller is responsible for the delivery charges to the shipping point. Since this is the beginning of the shipping process, it is the responsibility of the buyer (purchaser) to pay the freight charges from the shipping point to the destination. If the goods are being shipped from New York to Chicago, the invoice would state, “F.O.B. New York.” The freight charges paid by the buyer are charged to an account entitled “Freight on Purchases” and represent an expense directly related to determining the value of net purchases, cost of goods sold, and ultimately net income or net loss on sales.
Gross Sales
The balance in the sales ledger account before any consideration is made for possible sales returns, which are recorded to a separate account.
Periodic Inventory Method
The taking of a physical count of the merchandise on hand at the end of an accounting period.
