Chapter 5 Terms Flashcards
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.
Contra revenue account
An agreement between two or more parties that creates enforceable rights and obligations.
Contract
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.
Contract-based approach
An account in the general ledger that summarizes the detail for a subsidiary ledger and controls it
Control account
The cost of the goods on hand at the beginning of the period (beginning inventory) plus the cost of goods purchased during the period.
Cost of goods available for sale
Net purchases (purchases minus purchase returns and allowances and purchase discounts) plus freight in.
Cost of goods purchased
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.
Cost of goods sold
A main act that signals substantial completion of performance when using the earnings approach to revenue recognition.
Critical event
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.
Earnings approach
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.
FOB destination
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.
FOB shipping point
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).
Function
Sales revenue (net sales) less cost of goods sold.
Gross profit
Gross profit expressed as a percentage of net sales. It is calculated by dividing gross profit by net sales.
Gross profit margin
Total sales before deducting the contra revenue accounts.
Gross sales
An income statement that shows several steps to determine profit or loss.
Multiple-step income statement
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).
Nature
Purchases minus purchase returns and allowances and purchase discounts.
Net purchases
Sales less sales discounts, allowances, and returns
Net sales
Other revenues and expenses that are unrelated to the company’s main operations.
Non-operating activities
Expenses incurred in the process of earning sales revenue. They are deducted from gross profit in the income statement.
Operating expenses
An obligation to provide goods or services to another party in a contract with a customer.
Performance obligation
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.
Periodic inventory system
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.
Perpetual inventory system
Profit from a company’s main operating activity, determined by subtracting operating expenses from gross profit.
Profit from operations
Profit expressed as a percentage of net sales. It is calculated by dividing profit by net sales.
Profit margin
Measures of a company’s profit or operating success (or shortcomings) for a specific period of time.
Profitability ratios
A discount, based on the invoice price less any returns and allowances, given to a buyer for early payment of a balance due.
Purchase discount
The return, or reduction in price, of unsatisfactory merchandise that was purchased. It results in a debit to Cash or Accounts Payable.
Purchase returns (allowances)
A cash discount that reduces the invoice price and is given to the buyer for volume purchases.
Quantity discount
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.
Right of return
A reduction, based on the invoice price less any returns and allowances, given by a seller for early payment of a credit sale.
Sales discount
The main source of revenue in a merchandising company.
Sales revenue
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.
Sales returns (allowances)
An income statement that shows only one step (revenues less expenses) in determining profit (or loss).
Single-step income statement
A group of accounts that give details for a control account in the general ledger.
Subsidiary ledger
The amount a seller expects to receive in exchange for the goods promised to the customer.
Transaction price
Any amount that may change what the seller receives when the performance obligation is complete.
Variable consideration
