Chapter 4 Flashcards
Ratio used to assess a company’s ability to settle its current debts with its most liquid assets; defined as quick assets (cash, short-term investments, and current receivables) divided by current liabilities.
ACID-TEST RATIO
quick assets / current liabilities
Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.
CASH DISCOUNT
Cost of inventory sold to customers during a period; also called COST of SALES
COST OF GOODS SOLD
beginning inventory \+ cost of goods purchased = goods available for sale - ending inventory = cost of goods sold
Notification that the sender has credited the recipient’s account in the sender’s records.
CREDIT MEMORADUM
Time period that can pass before a customer’s payment is due.
CREDIT PERIOD
Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future.
CREDIT TERMS
Notification that the sender has debited the recipient’s account in the sender’s records.
DEBIT MEMORANDUM
Time period in which a cash discount is available and the buyer can make a reduced payment.
DISCOUNT PERIOD
Abbreviation used to describe credit terms and transactions.
EOM (END OF the MONTH)
Abbreviation describing the point when ownership of goods passes to the buyer.
FOB (FREE ON BOARD)
Expenses that support the operating activities of a business.
GENERAL & ADMINISTRATIVE EXPENSES
Net sales minus costs of goods sold; also called GROSS PROFIT.
GROSS MARGIN
Gross margin (net sales minus costs of goods sold) divided by net sales; also called GROSS PROFIT RATIO.
GROSS MARGIN RATIO
gross margin / net sales
Another name for GROSS MARGIN.
GROSS PROFIT
Goods a company owns and expects to sell in its normal operations.
INVENTORY
Catalog (full) price of an item before any trade discount is deducted.
LIST PRICE
Goods that a company owns and expects to sell to customers.
MERCHANDISE or MERCHANDISE INVENTORY
beginning inventory
+ net purchases
= merchandise for sale
ending inventory
+ cogs
= merchandise for sale
Entity that earns net income bu buying and selling merchandise.
MERCHANDISER
Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales & expenses.
MULTIPLE-STEP INCOME STATEMENT
Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available.
PERIODIC INVENTORY SYSTEM
Method that maintains continuous records of the cost of inventory available and the cost of goods sold.
PERPETUAL INVENTORY SYSTEM
Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.
PURCHASE DISCOUNT
Intermediary that buys products from manufacturers or wholesalers and sells them to consumers.
RETAILER
Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.
SALES DISCOUNT
Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers.
SELLING EXPENSES
Inventory losses that occur as a result of theft or deterioration.
SHRINKAGE
Income statement format that includes cost of goods sold as an expense and shows only one subtotal for total expenses.
SINGLE-STEP INCOME STATEMENT
Information outside the usual accounting records.
SUPPLEMENTARY RECORDS or SUPPLEMENTAL RECORDS
Reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers.
TRADE DISCOUNT
Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.
WHOLESALER
The buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier.
FOB SHIPPING POINT (or FACTORY)
The seller pays shipping costs and buyer accepts ownership of goods at the buyer’s place of business.
FOB DESTINATION
What transaction shows the purchase of merchandise for resale?
MERCHANDISE INV. Dr
CASH or A/P Cr
What transaction shows paying freight costs on purchases (FOB shipping point)?
MERCHANDISE INV. Dr
CASH Cr
What transaction shows paying for purchased merchandise within a discount period?
A/P Dr
CASH Cr
MERCH. INV. Cr
What transaction shows recording of purchase returns or allowances?
CASH or A/P Dr
MERCH. INV. Cr
What transaction shows the sale or merchandise?
A/R or CASH Dr
SALES Cr
COST of GOODS SOLD Dr
MERCH. INV. Cr
What transaction shows the receipt of payment within a discount period?
CASH Dr
SALES DISCOUNTS Dr
A/R Cr
What transaction shows granting sales returns or allowances?
SALES RETURNS & ALLOWANCES Dr
CASH or A/R Cr
MERCHANDISE INVENTORY Dr
COST OF GOODS SOLD Cr
What transaction shows paying freight on sales (FOB destination)?
DELIVERY EXPENSE Dr
CASH Cr
What adjustment shows shrinkage (which only occurs when the recorded amount is larger than the physical inventory)?
COST OF GOODS SOLD Dr
MERCH. INV. Cr
What entry closes temporary accounts with credit balances?
SALES Dr
INVENTORY SUMMARY Cr
What entry closes temporary accounts with debit balances?
INVENTORY SUMMARY Dr
SALES RETURNS & ALLOWANCES Cr
SALES DISCOUNTS Cr
COST OF GOODS SOLD Cr
DELIVERY EXPENSE Cr
OTHER EXPENSE Cr
How is net income calculated for a merchandiser?
NET SALES - COST OF GOODS SOLD = GROSS PROFIT - EXPENSES = NET INCOME
How is net income calculated for a service provider?
REVENUES
- EXPENSES
= NET INCOME
How is NET SALES calculated?
SALES
- SALES DISCOUNTS
- SALES RETURNS & ALLOWANCES
= NET SALES
How is GROSS PROFIT or GROSS MARGIN calculated?
NET SALES
- COGS
= GROSS PROFIT or GROSS MARGIN
How is INCOME FROM OPERATIONS calculated?
GROSS PROFIT
- TOTAL OPERATING EXPENSES
= INCOME FROM OPERATIONS
How is the CURRENT RATIO calculated?
current assets / current liabilities
