Exam 3: Ch. 5-7 Vocabulary

Question 1

the amounts owed to the company by its customers from the sale of goods or services on account

Answer 1

accounts receivable

Question 2

basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for “old” accounts than for “new” accoutns

Answer 2

aging method

Question 3

contra asset account representing the amount of accounts receivable not expected to be collected

Answer 3

allowance for uncollectible accounts

Question 4

method of reporting accounts receivable for the net amount expected to be collected

Answer 4

allowance method

Question 5

approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.

Answer 5

average collection period

Question 6

The cost of estimated future bad debts that is reported as an expense in the current years income statement

Answer 6

bad debt expense

Question 7

An account with a balance that is opposite to that of its related revenue account

Answer 7

contra revenue account

Question 8

Transfer of goods or services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

Answer 8

credit sales

Question 9

Recording bad debt expense at the time we know the account is actually uncollectible

Answer 9

direct write-off method

Question 10

A source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms

Answer 10

invoice

Question 11

The difference between total accounts receivable and the allowance for uncollectible accounts

Answer 11

net accounts receivable

Question 12

A company’s total revenues less any discounts, returns, and allowances

Answer 12

net revenues

Question 13

Formal credit arrangements evidenced by a written debt instrument

Answer 13

Notes receivable

Question 14

Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected

Answer 14

percentage-of-receivables method

Question 15

Number of times during a year that the average accounts receivable balance is collected. It equals net credit sales divided by average accounts receivable

Answer 15

receivables turnover ratio

Question 16

Seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s good or service

Answer 16

sales allowance

Question 17

Reduction in the amount to be received from a credit customer if collection on account occurs within a specified period of time

Answer 17

sales discount

Question 18

Customer returns a product

Answer 18

sales return

Question 19

A group of individual accounts associated with a particular general ledger control account

Answer 19

subsidiary ledger

Question 20

Reduction in the listed price of a good or service

Answer 20

trade discount

Question 21

Customers’ accounts that no longer are considered collectible

Answer 21

uncollectible accounts

Question 22

Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.

Answer 22

average days in inventory

Question 23

Cost of the inventory that was sold during the period

Answer 23

cost of goods sold

Question 24

Inventory costing method that assumes the first units purchased are the first ones sold

Answer 24

First-in, first-out method (FIFO)

Question 25

Cost to transport inventory to the company, which is included as part of inventory cost

Answer 25

freight-in

Question 26

Cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense

Answer 26

freight-out

Question 27

The difference between net sales and cost of goods sold

Answer 27

gross profit

Question 28

Measure of the amount by which the sale of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.

Answer 28

gross profit ratio

Question 29

Operating income plus non-operating revenues less non-operating expenses

Answer 29

income before income taxes

Question 30

Items a company intends for sale to customers in the ordinary course of business

Answer 30

inventory

Question 31

The number of times a firm sells its average inventory balance during a reporting period. It equals cost of goods sold divided by average inventory

Answer 31

inventory turnover ratio

Question 32

Inventory costing method that assumes the last units purchased are the first ones sold

Answer 32

Last-in, first-out method (LIFO)

Question 33

An adjustment used to convert a company's own inventory records maintained throughout the year on a FIFO basis to LIFO basis for preparing financial statements at the end of the year

Answer 33

LIFO adjustment

Question 34

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

Answer 34

LIFO conformity rule

Question 35

Method where companies report inventory in the balance sheet at the lower of cost and net realizable value, where net realizable value equals estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation

Answer 35

Lower of cost and net realizable value

Question 36

An income statement that reports multiple levels of income or profitability

Answer 36

multiple-step income statement

Question 37

Difference between all revenues and all expenses for the period

Answer 37

net income

Question 38

Estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation

Answer 38

net realizable value

Question 39

Profitability from normal operations that equals gross profit less operating expenses

Answer 39

operating income

Question 40

Inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand

Answer 40

periodic inventory system

Question 41

Inventory system that maintains a continual record of inventory purchased and sold

Answer 41

perpetual inventory system

Question 42

Inventory costing method that matches or identifies each unit of inventory with its actual cost

Answer 42

specific identification method

Question 43

Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale

Answer 43

weighted-average cost method

Question 44

Allocates a higher depreciation in the earlier years of the asset's life and lower depreciation in later years

Answer 44

accelerated depreciation method

Question 45

A contra asset account representing the total depreciation taken to date

Answer 45

accumulated depreciation

Question 46

Allocates an asset's cost based on its use

Answer 46

activity-based method

Question 47

Occurs when a new major component is added to an existing asset

Answer 47

addition

Question 48

Allocation of the cost of an intangible asset over its service life

Answer 48

amortization

Question 49

Net sales divided by average total assets, which measures the sales per dollar of assets invested

Answer 49

asset turnover

Question 50

Purchase of more than one asset at the same time for one purchase price

Answer 50

basket purchase

Question 51

Recording all losses in one year to make a bad year even worse

Answer 51

big bath

Question 52

An asset's original cost less accumulated depreciation

Answer 52

book value

Question 53

Record an expenditure as an asset

Answer 53

capitalize

Question 54

An exclusive right of protection given to the creator of a published work such as a song, film, painting, photograph, book, or computer software

Answer 54

copyright

Question 55

An accelerated depreciation method that records more depreciation in earlier years and less depreciation in later years

Answer 55

declining-balance method

Question 56

Allocating the cost of a long-term asset to an expense over its service life

Answer 56

depreciation

Question 57

The pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time

Answer 57

depreciation method

Question 58

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area

Answer 58

franchise

Question 59

the purchase price less the fair value of the net assets acquired

Answer 59

goodwill

Question 60

Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation)

Answer 60

impairment

Question 61

The cost of replacing a major component of an asset

Answer 61

improvement

Question 62

Long-term assets that lack physical substance, and whose existence is often based on a legal contract

Answer 62

intangible assets

Question 63

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

Answer 63

land improvements

Question 64

Large enough to influence a decision

Answer 64

material

Question 65

Assets like oil, natural gas, and timber that we can physically use up or deplete

Answer 65

natural resources

Question 66

An exclusive right to manufacture a product or to use a process

Answer 66

patent

Question 67

Net income divided by net sales; indicates the earnings per dollar of sales

Answer 67

profit margin

Question 68

Expenses that maintain a given level of benefits in the period incurred

Answer 68

repairs and maintenance

Question 69

The amount the company expects to receive from selling the asset at the end of its service life; also referred to as salvage value

Answer 69

residual value

Question 70

Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets

Answer 70

return on assets

Question 71

How long the company expects to receive benefits from the asset before disposing of it; also referred to as useful life

Answer 71

service life

Question 72

Allocates an equal amount of depreciation to each year of the asset's service life

Answer 72

straight-line method

Question 73

A word, slogan, or symbol that distinctively identifies a company, product, or service

Answer 73

trademark