exam 2 Flashcards
1
Q
credit sales
A
company provide services to customers on account
- informal credit agreement supported by invoice
2
Q
invoice
A
document that identifies date of sale, the customers, and specific item sold, dollar amount, and payment term
3
Q
benefits of extending credit
A
- convenient for buyers to purchase goods
- increase profitability of the company
4
Q
Costs of extending credit
A
- customer may not end up paying
- reduce operating efficiency
- lower profitability
5
Q
nontrade receivable
A
originate from sources other than customers
- ex:
- tax refund claim
- interest receivable
- stockholder equity
6
Q
note receivable
A
receivable from a formal credit arrangement made with written debt notes
7
Q
net revenue
A
total revenue - amounts of returns, allowance, and discounts
8
Q
trade discounts
A
represent reduction in the listed price of good or services
ex: 20% trade discount for buying bulks
9
Q
sale returns
A
returned goods from previous purchase
10
Q
contra revenue account
A
account w a balance that is opposite of revenue account
ex:
sale return, discount, allowance
11
Q
sale allowance
A
seller initiate price reductions to customer account due to problem with the buyer’s order
(partial refund)
12
Q
sale discount
A
reduction in amount to be received from a credit customer if collection occurs within a period of time
ex: 2/10 = 2%
13
Q
discount terms
A
short hand way to communicate amount of discount and time period
ex: 2/10
2% discount if paid in 10 days
14
Q
Bad debt (uncollectible) accounts
A
customers account receivable that is no longer expected to be collected
“bad debt”
15
Q
upside of extending credit
A
boost sales
16
Q
downside of extending credit
A
not all customer will pay it back
17
Q
allowance method
A
method to estimate the amount the company expects will be uncollectible
- GAAP required
- report as contra asset to account receivable in balance sheet
18
Q
Step 1 of allowance method
A
- establish an allowance for uncollectible account
ex:
account receivable: 6000
estimate to be uncollected: 50% (so 3000)
bad debt expense DR
allowance uncollectible CR
19
Q
allowance for uncollectible account
A
contra asset account that represent amount of account receivable not expected to be collected
20
Q
net accounts receivable
A
total account receivable - allowance uncollectible
21
Q
bad debt expense
A
represent cost of estimated future bad debts that is reported as an expense in current year
22
Q
Step 2 of allowance method
A
- writing off account receivable
allowance uncollectible DR
account receivable CR
- no change in net receivable or total asset (cuz we already estimated it)
23
Q
collecting account receivable that was written off
A
account receivable DR
allowance uncollectible CR
cash DR
account receivable CR
24
Q
Step 3 of allowance method
A
- adjusting the allowance in subsequent year
25
percentage-of-receivable method
method of estimating uncollectible account based on the percentage of account receivable expected to not be collected
- base estimate of bad debts in balance sheet
26
aging method
base estimate of future bad debts on various age of individual account receivable
- higher % for old account
- lower % for new account
27
subsidiary ledger
Track each individual account
ex: customer A, B , C ( multiple T table)
Whereas general ledger is a combinations of the account (1 T table)
28
direct write-off method
write off bad debts only at time it actually become uncollectible
- NOT GAAP
cause asset to be overstated
expense understated
- use by tax reporting company
Bad debt expense DR
Account Receivable CR
29
interest
face value x annual interest rate x fraction of the year
30
receivable turnover ratio
provide measure of company abilities to collect cash from customers
- show NUMBER OF TIME that average AR balance is collected (turnover)
- more turnover = more effective in gaining credit and collecting cash
31
net credit sales
total credit sales of net discount/return/allowance
32
average account receivable
reported in this period and last period balance sheet
33
average collection period
show approximate NUMBER OF DAYS the average AR balance is outstanding
34
percentage of credit sale method
estimate uncollectible account using percentage of credit sale
- base estimate on income statement
35
inventory
items a company intends for sale to customers
36
manufacturing companies
produce the inventories they sell
37
raw material inventory
(manufacturing company inventory)
cost of material used to make finished good
38
work-in-progress inventory
(manufacturing company inventory)
material that are waiting to be assemble
39
finish good inventory
(manufacturing company inventory)
cost of finished good but unshipped
40
total inventory
raw material + work-in-process + finish good
41
merchandising company
Company buy good and resell then for a higher price
2 type
Retail
Wholesale
42
wholesalers
Purchase good from merchandising or manufacture and sell inventory to retailers in bulks
43
retailers
Sells good directly to customers
44
cost of good sold
cost of inventory that was sold during the period
-expense
45
multiple step income statement
income statement that report multiple levels of income
46
gross profit
(multiple step income)
net revenue or sales - cost of goods
- record 1st
47
operating income
(multiple step income)
gross profit - operating expense
- record 2nd
- measure profitability from primary operations
48
income before income taxes
(multiple step income)
operating income + nonoperating income
49
net income
revenue - expense
50
specific identification
(inventory cost method)
method that match or identify each unit of inventory w actual cost
- use by company w unique and low sale volume
- ex: jewelry
51
first in first out (FIFO)
(inventory cost method)
first units (oldest) purchased are first one sold
52
last in first out (LIFO)
(inventory cost method)
last unit (newest) purchase are firsts one sold
53
weighted - average cost
(inventory cost method)
both cost of goods sold and ending inventory consist of a random mixture of all goods available for sale
54
LIFO reserve
different amount between LIFO and FIFO
55
perpetual inventory system
continual record of inventory purchase and sold
56
periodic inventory system
does not continually record inventory amount
- calculate balance of inventory once per PERIOD
57
LIFO adjustment
used to convert a company own inventory records maintained throughout the year on a FIFO basis to LIFO basis for preparing financial statement at the end of the year
58
freight charfes
shipping or delivery charges from suppliers or to customers
59
FOB
free on board
60
FOB shipping point
title passes (ownership) when sellers ship the inventory
- seller pays fees
61
FOB destination
title passes (ownership) when inventory reach buyers destination
- buy pays fees
62
freight-in
money that the business spends to transport in goods to the business
- cost of good sold
63
freight-out
cost of shipping good to customers
- selling expense
64
purchase discount
lower cost of purchase in made within a time frame for customers
seller pov: discount = sale discount
buyers pov: discount = purchase discount
65
purchase return
company return damage inventory to suppliers
66
net realizable value
value of inventor falls below original cost
- estimate selling price of inventory
67
lower of cost and net realize value
company report inventory in balance sheet at lower of cost and net realizable values
net realizable = estimate selling price of inventory - cost of completion, disposal, & transportation
68
inventory turnover ratio
show NUMBER OF TIMES the firm sells average inventory
69
gross profit ratio
- measure amount by which the sale of inventory exceed cost per dollar of sales
70
average days in inventory
indicate approximate NUMBER OF DAYS the average inventory is held
71
intangible asset
nonphysical item that has potential revenue
72
tangible asset
physical asset owned by company
73
capitalize
record an expenditure (payment) of an asset
74
land
(tangible)
land account represent land a company is using for operation
75
capitalize land
all expenditures necessary to get it read to use
76
land improvement
(tangible)
improvement to land such as paving, lighting, landscaping, that are subjected to depreciation
77
building
(tangible)
building cost + other cost
78
equipment
(tangible)
79
basket purchase
when companies purchase more than 1 asset at the same time for 1 purchase price
80
fair value
estimated price an asset was brought or sold
81
natural resources
(tangible)
oil, natural gas, timber, salt
82
patent
(intangible)
exclusive rights to manufacture a product or to use a process
-20 years
83
copyright
(intangible)
exclusive right to copy, distribute, and display works (no one else can)
84
trademark
(intangible)
words/slogan/symbol that distinctively identifies a company, product, or service
85
franchise
(intangible)
local outlet that pays for exclusive right to use franchiser company name and sell its products
86
goodwill
(intangible)
purchase price - fair value of net assets required
-ONLY RECORD when 1 company acquires another company
-often the largest intangible asset
87
capitalize and expense
capitalize expenditures as an asset if it increase FUTURE benefits
expense expenditures if it benefit only the CURRENT period
88
repairs & maintenance
(current)
(expenditures)
maintaining a given level of benefit
period benefit: current
accounting treatment: expense
89
repairs & maintenance
(future)
(expenditures)
making major repairs that increase future benefits
period benefits: future
accounting treatment: capitalize
90
addition
(expenditures)
adding new major components
period benefits: future
accounting treatment: capitalize
91
improvement
(expenditures)
replacing new major component
period benefits: future
accounting treatment: capitalize
92
legal defense of intangible asset
(expenditures)
incurring litigation cost to defend the legal right to the asset
period benefits: future
accounting treatment: capitalize
93
materiality
items are materiality if its large enough to influence a decisions
94
depreciation
allocation (distribute) of asset cost to an expensive over time
- tangible asset
95
amortization
process cost allocation for intangible asset
96
accumulated depreciation
contra asset account
97
book value
original cost of assets - current balance accum depreciation
98
service life
estimate benefit the company expects to receive from asset before disposing it
99
residual value
amount company expects to receive from selling the asset
100
depreciation method
pattern in which the asset depreciable cost is allocated over time
101
straight line method
allocate EQUAL amount of depreciation cost to each year of asset service life
102
accelerated depreciation method
allocates higher depreciation in earlier year of asset life
lower depreciation in later year
103
declining balance method
record more depreciation in earlier years
less depreciation in later year
- higher than straight line in earlier year
- lower in later year
- result same depreciation
104
activity based depreciation
allocate an asset cost based on its use
- straight line n declining balance measure TIME
105
tax depreciation
106
intangible assets SUBJECT to amortization
intangible have finite useful life that can be estimated
107
intangible assets NOT SUBJECT to amortization
intangible have unlimited life
108
sale
(asset disposal)
sale long term asset and gain cash
- a gain or loss can occur in income statement
109
gain
occur when asset sold for more than book value
110
loss
asset sold for less than book value
111
retirement of long term asset
(asset disposal)
long term asset is no longer useful but cannot be sold
112
exchange of long-term asset
2 company trade assets
- use cash to make up for any differences in fair value between asset
113
return on asset
measure amount of net income generated for each dollarp
114
profit margin
ratio indicates the earning per dollar of sales
115
asset turnover
ratio measure the sales per dollar of asset invested
116
liability
what company owe
117
current liability
due in 1 yr
118
long term liability
due in more than 1 yr
119
note payable
written promise to repay amount borrow with interest
120
line of credit
informal agreement that permit a company to borrow up to a prearranged limit
121
commercial paper
company borrow from another company
122
account payable
amount owe to suppliers or services
123
deferred revenue
company receive payment but provide service in future date
124
gift card breakage
point in time when gift cards expires or the likelihood of redemption is viewed as remote
125
sale tax payable
current liability account that keep track of sale tax from customers and pay sale tax to government later
126
current portion of long term debt
amount that will be paid within 1 yr
127
reclassification
long term liability are reclassified and reported as current liabilities when they become payable within the next year
128
contingencies
uncertain situation that can result in a gain or loss for a company
129
contingent liability
existing uncertain situation that might result in loss depending on future event outcome
- ex:
lawsuit
130
contingent gain
existing uncertain situation that might result in gain
-ONLY RECORD GAIN when gain is CERTAIN
131
liquidity
have sufficient cash to pay currently maturing debts
- lack of liquidity = financial difficulties or bankruptcies
132
working capital
(measure liquidity)
different between current asset and current liability
-not the best measurement
133
current ratio
(measure liquidity)
current ratio > 1 = asset > liability
current ratio < = asset < liability
higher ratio = greater company liability
134
acid test ratio
(measure liquidity)
similar to current ratio but more conservative measure of current asset available to pay
- provide better measurement than current ratio
135
quick asset
include only cash, current investment, and AR
136
debt covenant
agreement between a borrowers and a lender that requires certain minimum financial measure to be met or the lender can recall the debt
