Exam 2 Flashcards
Perpetual Inventory System
company keeps track of sales and purchases of inventory as they are made; updates the inventory figures each time a transaction is made
Periodic Inventory System
system where an inventory figure is only known after the periodic physical count
Perpetual Advantage
- At any point in time know how much product is in inventory
- Can tell amount of inventory disappearing because of theft/spoilage
- Can update records any time of the year (not just at the end of the accounting period)
Periodic Advantage
-Less costly than perpetual
Perpetual Disadvantage
- Costly to install
- Requires more day to day work
Periodic Disadvantage
- Only know inventory figure after physical count is done
- No idea whether any items were missing or not because no record of what should be in the warehouse
- Must count inventory to correct records (so must take inventory at the end of an accounting period)
3 Types of Cash Flow Assumptions
FIFO
LIFO
Weighted-Average
FIFO
First in, First Out
LIFO
Last in, First out
Weighted Average
the most natural cost flow assumption; the cost of each item in inventory is assumed to be the average cost of all the inventory items on hand
Marketing
has to do with determining the wants and demands of the customers and then deciding how to fulfill them
Mark-up
when merchandisers purchase already manufactured products and resell them at a higher price
Merchandise inventory (AKA inventory)
the products that stores resell
Purchases account
where all purchases during a period are kept
-A companion account to inventory
Concur account
has the same normal balance as its companion
Contra account
account with the opposite normal balance
Purchase allowances
price reductions granted by the supplier to make amends for some error on its part
Wholesaler
a company that sells to other companies like merchandisers, not individuals
Net purchases
gross purchases made throughout the period, plus freight in, less purchase discounts and purchase returns and allowances
–Net purchases = Gross purchases + Freight in
Gross margin
sales revenue less cost of goods sold
Gross margin percentage
(Gross margin) / (net sales rev) * 100%
GAS
Beg Inv + Net purchases
COGS
GAS - Ending Inv
Net Sales
Gross sales - Discounts - Returns and Allowances
Gross Margin
Net Sales - COGS
Internal controls (def)
those actions and policies that a company uses to safeguard assets, maintain correct accounting records, encourage efficiency, and promote adherence to company policies
Internal controls (components)
- Use of competent, reliable employees
- Appropriate assignment of responsibility and detail
- Transactions are clearly authorized
- Provision for the separation of duties
- Performance of both internal and external audits
- Maintenance of proper documentation and records
Human resource management
the field within business that focuses on the individuals who work for a business entity
Cash equivalents
highly liquid and extremely safe (short term investments such as US treasury bills)
–Does NOT include stamps (supplies) and IOUs (receivables)
Maturity
The specified date of the last payment
Maturity value
principal + interest
Turnover ratio
(Income statement Account value for period) / (average level of the balance sheet account for period)
Accounts receivable turnover ration
(Net sales revenue) / (average net accounts receivable)
Conservatism concept
when two or more accounting alternatives appear to fulfill reporting objectives, then the methods that provides the least favorable impact on the firm is chosen
Long-lived/operating assets
those assets used to produce and sell goods and services to customers
Tangible assets
long-lived assets that have a physical form (land, equipment, and buildings)
Group/basket purchase
several assets are purchased at the same time for a single specified amount
fair market value
amount that an independent buyer would pay for the item in question
useful life
is the time period over which it is believed that an asset will be useful; not necessarily how long the asset may last, just how long it will be useful
residual value
the value of an asset at the end of its useful life
Straight-line depreciation equation
depreciation = (Cost - residual value) / (Useful life)
Units of production depreciation equation
depreciation = (cost - residual value) / number of units
Declining balance depreciation equation
present book value * the depreciation rate until you get to the residual value
Loss on sale account
an owners’ equity account that reflects the reduction of owners’ equity caused by replacing the higher book value of the asset for the asset cash.
Commercial substance
an exchange somehow leads to a significant change in the company’s ability to generate cash flow in the future
A gain can not be recognized if the exchange is deemed to not have ___________.
Commercial substance
Patent
represents the right, granted by a governmental agency, to the exclusive use of a product or process (17 year period in US)
Copyright
a grant to the owner for the exclusive right to reproduce and sell an artistic or literary work
Trademarks/Trade names
special words or symbols that identify a particular product
Franchise
an agreement granting a business the right to use the name, product, processes, etc. or another entity according to a set of conditions within a specified area
Leasehold improvements
the right of the less to use such improvements during the term of the lease
Capital expenditures
expenditures that provide benefits in the future
Revenue expenditures (expenses)
viewed as being associated with the operations of a firm for the purpose of generating immediate income
Amortization
the process of systematically reducing the original cost of an asset reflect the amount that the asset was used up
–Used with intangible assets
Goodwill
the difference between the purchase price and the fair market value of the acquired assets (less liabilities)
–Is a unique intangible asset
Natural resources
minerals, oil, and timber
Depletion
the same are depreciation and amortization, but is used with natural resources
Simple interest formula
Principal * Annual interest rate * Time = Interest
Compound interest
when you leave the interest you’ve earned in the bank, it earns you more interest
Future Value of a single payment equation
FV = PV * FVfactor
Present Value of a single payment equation
PV = FV * PVfactor
Present Value of an annuity
PVA = PMT * PVAfactor
Future Value of an annuity
FVA = PMT *FVAfactor
Estimating Ending Inventory: Gross Margin Method
GM% = GM / Sales
GM = Sales - COGS
Estimating Ending Inventory: Retail Method
Cost Ratio = (GAS @ HC) / (GAS @ Retail)
COGS = Nets Sales * Cost ratio
The concept that the information generated by an accounting system should impact the decision-making of someone perusing the information.
Relevance
The concept can involve the content of the information and/or its timeliness, both of which can impact decision making.
The concept of only recording those transactions in the accounting system that you can verify with objective evidence.
Reliability
requires that the information should be accurate and true and fair.
