Chapter 5 Terms

Question 1

An account with the opposite balance (debit) compared with its related revenue account, which has a credit balance. The contra revenue account is deducted from the revenue account on the income statement.

Answer 1

Contra revenue account

Question 2

An agreement between two or more parties that creates enforceable rights and obligations.

Answer 2

Contract

Question 3

An approach to revenue recognition that is used when a company follows IFRS and is based on the enforceable rights and obligations agreed upon in a contract with a customer.

Answer 3

Contract-based approach

Question 4

An account in the general ledger that summarizes the detail for a subsidiary ledger and controls it

Answer 4

Control account

Question 5

The cost of the goods on hand at the beginning of the period (beginning inventory) plus the cost of goods purchased during the period.

Answer 5

Cost of goods available for sale

Question 6

Net purchases (purchases minus purchase returns and allowances and purchase discounts) plus freight in.

Answer 6

Cost of goods purchased

Question 7

The total cost of merchandise sold during the period. In a perpetual inventory system, it is calculated and recorded for each sale. In a periodic inventory system, the total cost of goods sold for the period is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale.

Answer 7

Cost of goods sold

Question 8

A main act that signals substantial completion of performance when using the earnings approach to revenue recognition.

Answer 8

Critical event

Question 9

An approach to revenue recognition that is used when a company follows ASPE that requires revenue to be recognized when a performance obligation is complete, the amount can be reliably measured, and collection of amounts due from the customer is probable.

Answer 9

Earnings approach

Question 10

A freight term indicating that the buyer accepts ownership when the goods are delivered to the buyer’s place of business. The seller pays the shipping costs and is responsible for damages to the goods during transit.

Answer 10

FOB destination

Question 11

A freight term indicating that the buyer accepts ownership when the goods are placed on the carrier by the seller. The buyer pays freight costs from the shipping point to the destination and is responsible for damages.

Answer 11

FOB shipping point

Question 12

A method of classifying expenses on the income statement based on which business function the resources were spent on (e.g., costs of sales, administration, and selling).

Answer 12

Function

Question 13

Sales revenue (net sales) less cost of goods sold.

Answer 13

Gross profit

Question 14

Gross profit expressed as a percentage of net sales. It is calculated by dividing gross profit by net sales.

Answer 14

Gross profit margin

Question 15

Total sales before deducting the contra revenue accounts.

Answer 15

Gross sales

Question 16

An income statement that shows several steps to determine profit or loss.

Answer 16

Multiple-step income statement

Question 17

A method of classifying expenses on the income statement based on what the resources were spent on (e.g., depreciation, employee costs, transportation, and advertising).

Answer 17

Nature

Question 18

Purchases minus purchase returns and allowances and purchase discounts.

Answer 18

Net purchases

Question 19

Sales less sales discounts, allowances, and returns

Answer 19

Net sales

Question 20

Other revenues and expenses that are unrelated to the company’s main operations.

Answer 20

Non-operating activities

Question 21

Expenses incurred in the process of earning sales revenue. They are deducted from gross profit in the income statement.

Answer 21

Operating expenses

Question 22

An obligation to provide goods or services to another party in a contract with a customer.

Answer 22

Performance obligation

Question 23

An inventory system where detailed inventory records are not updated whenever a transaction occurs. The cost of goods sold is determined only at the end of the accounting period.

Answer 23

Periodic inventory system

Question 24

An inventory system where detailed records, showing the quantity and cost of each inventory item, are updated whenever a transaction occurs. The records continuously show the inventory that should be on hand.

Answer 24

Perpetual inventory system

Question 25

Profit from a company’s main operating activity, determined by subtracting operating expenses from gross profit.

Answer 25

Profit from operations

Question 26

Profit expressed as a percentage of net sales. It is calculated by dividing profit by net sales.

Answer 26

Profit margin

Question 27

Measures of a company’s profit or operating success (or shortcomings) for a specific period of time.

Answer 27

Profitability ratios

Question 28

A discount, based on the invoice price less any returns and allowances, given to a buyer for early payment of a balance due.

Answer 28

Purchase discount

Question 29

The return, or reduction in price, of unsatisfactory merchandise that was purchased. It results in a debit to Cash or Accounts Payable.

Answer 29

Purchase returns (allowances)

Question 30

A cash discount that reduces the invoice price and is given to the buyer for volume purchases.

Answer 30

Quantity discount

Question 31

A right that enables a customer to receive (1) a full or partial refund of any consideration paid, (2) a credit that can be applied against amounts owed, or (3) a different product in exchange.

Answer 31

Right of return

Question 32

A reduction, based on the invoice price less any returns and allowances, given by a seller for early payment of a credit sale.

Answer 32

Sales discount

Question 33

The main source of revenue in a merchandising company.

Answer 33

Sales revenue

Question 34

The return, or reduction in price, of unsatisfactory merchandise that was sold. They result in a credit to Cash or Accounts Receivable and a debit to Sales Returns and Allowances. If the returned merchandise can be resold, a debit to Merchandise Inventory and a credit to Cost of Goods Sold also result.

Answer 34

Sales returns (allowances)

Question 35

An income statement that shows only one step (revenues less expenses) in determining profit (or loss).

Answer 35

Single-step income statement

Question 36

A group of accounts that give details for a control account in the general ledger.

Answer 36

Subsidiary ledger

Question 37

The amount a seller expects to receive in exchange for the goods promised to the customer.

Answer 37

Transaction price

Question 38

Any amount that may change what the seller receives when the performance obligation is complete.

Answer 38

Variable consideration