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Accounting 201 > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

Credit sales

A

Transfer products and services to a customer today while bearing the risk of collection payment from that customer in the future

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2
Q
  • even though we don’t revive cash at the time do credit sale we still record revenue as long as future collection is reasonably certain
A

.

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3
Q

Net revenues

A

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

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4
Q

Trade discounts

A

A reduction in the listed price of a product or service

- to provide incentives

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5
Q

Sales return

A

When a customer returns a product

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6
Q

sales allowance

A

Providing a reduction or a partial refund

- recorded as a contra revenue

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7
Q

Contra revenue

A

an account with a balance that is opposite to that of a related revenue account
- it is not an expense

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8
Q

Sales discount

A

A reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time
- record as a contra revenue account

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9
Q

Net realizable value

A

The amount of cash the firm expects to collect

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10
Q

Un collectible accounts (bad debts)

A

Customers accounts that we no longer consider collectible.

  1. Reduces assets
  2. Increases expenses
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11
Q

Allowance method

A

Allowing for the possibility that some accounts will be un collectible at some point in the future. Companies are required to estimate future un collectible accounts and record those estimates in the current year

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12
Q

Percentage of receivables method

A

Estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected (sometimes known as balance sheet method)

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13
Q

Bad debt expense

A

Represents the cost of the estimated future bad debts

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14
Q

allowance for uncollectible accounts

A

Represents the amount of accounts receivable we do not expect to collect

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15
Q

Net accounts receiveable

A

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

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16
Q

aging method

A

Consider the age of various accounts receivable and use a higher % for old accounts than for new accounts. The older the account, the less likely it is to be collected

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17
Q

What does a credit balance before adjustment mean

A

that the estimate of uncollectible accounts at the beginning of the year may have been too high

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18
Q

What does a debit balance before adjustment mean

A

That the estimate at the beginning of the year was too low

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19
Q

direct write off method

A

Recording bad debt expense at time we know the account to be uncollectible
- used for tax purposes but is not generally permitted for financial accounting

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20
Q

Notes receivable

A

more formal credit arrangements evidenced by a written debt instrument

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21
Q

Receivables turnover ratio

A

Net credit sales / average accounts receivable

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22
Q

average collection period

A

365 days / receivables turnover ratio

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23
Q

service companies

A

earn revenue by providing services to their customers

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24
Q

Companies that earn revenue by selling inventory are either

A

Manufacturing or merchandising

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25
Q

Inventory

A

Items a company intends for sale or customers

  • also includes not yet finished products
  • reported as a current asset in the balance sheet
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26
Q

Cost of goods sold

A

The company reports the cost of the inventory it’s sold in the income statement
- often the largest expense in the income statement

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27
Q

Merchandising companies

A

Purchase inventories that are primarily in finished form for resale to customers

  • wholesalers
  • retailers
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28
Q

Manufacturing companies

A

Manufacture the inventory they sell, rather than buying it in finished form

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29
Q

Overhead

A

Indirect manufacturing costs

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30
Q

Multi step income statement

A

An income statement that reports multiple levels of income/profitability

  1. Gross profit
  2. Operating income
  3. Income before income taxes
  4. Net income
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31
Q

Gross profit

A

Net sales minus cost of goods sold

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32
Q

Operating expenses

A

Selling, general, and administrative expenses

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33
Q

Operating income

A

Gross profit reduced by these operating expenses

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34
Q

Income before income taxes

A

Combining operating income with nonoperating revenues and expenses

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35
Q

Net income

A

Subtract income tax expense to find.

All revenues- all expenses

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36
Q

Inventory cost methods

A

Specific identification method
FIFO method
LIFO method
Weighted average cost method

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37
Q

Specific identification method

A

Matches identities- each unit of inventory with its actual cost
- practical only for companies selling expensive, unique products

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38
Q

FIFO method

A

Assume the first units purchased are the first ones sold

- balance sheet approach

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39
Q

LIFO method

A

Assume the last units purchased are the first ones sold

- income state approach

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40
Q

weighted average cost method

A

Assume that both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale.
= cost of goods available for sale/number of units available for sale

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41
Q

Most companies actual physical flow follows

A

FIFO

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42
Q

During periods of rising costs (the case for most companies) FIFO results in

A

Higher ending inventory
Lower cost of goods sold
Hide reported profit than does LIFO

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43
Q

What is the primary benefit of choosing LIFO?

A

Tax savings

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44
Q

LIFO conformity rule

A

A company that uses LIFO for tax reporting also has to use LIFO of financial reporting

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45
Q

Perpetual inventory system

A

Involves recording inventory purchases and sales on a perpetual (continual) basis
- most often used in practice

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46
Q

Periodic inventory system

A

Does not continually record inventory amounts. Instead it calculates the balance of inventory once per period, at the end, based on a physical count of inventory on hand

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47
Q

LIFO adjustment

A

Adjusting inventory records maintained on a FIFO basis to a LIFO basis for preparing financial statements

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48
Q

Freight charges

A

Shipping/delivery charges

49
Q

Freight in

A

Freight charge on incoming shipments from suppliers

  • add to the balance of inventory
  • later when inventory is sold, the freight charges become part of cost of goods sold
50
Q

Freight out

A

The cost of freight on shipments to customers

51
Q

Purchase discounts

A

Same as sales discount, just from the buyers perspective

52
Q

Replacement cost

A

The cost to replace the inventory item in its identical form

53
Q

Lower of cost or market method (LCM)

A

once determined both the cost and market value of inventory the company reports ending inventory in the balance sheet at the lower of the 2 amounts

54
Q

Inventory turnover ratio

A

Number of times the firm sells its average inventory balance during a reported period
= cost of goods sold/average inventory

55
Q

average days in inventory

A

365/inventory turnover ratio

56
Q

gross profit ratio

A

Gross profit/net sales

57
Q

Tangible assets

A

Land, land improvements, buildings, equipment, natural resources

58
Q

Intangible assets

A

Patents, trademarks(most valuable) , copyrights, franchises, goodwill
- lack of physical substance

59
Q

Capitalize

A

Recording an expenditure as an asset

60
Q

Depreciation

A

The allocation of the cost of an asset over its service life

61
Q

Basket purchase

A

When companies purchase more than one asset at the same time for one purchase price

62
Q

Patent

A

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

63
Q

Copyright

A

An exclusive right of protection given by the US copyright office to the creator of a published work

64
Q

Trademark

A

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

65
Q

Franchise

A

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

66
Q

Goodwill

A

Represents the value of a company as a whole, over and above the value of its identifiable net assets

67
Q

Expenditure after acquisition

A 
Repairs and maintenance 
Addition
Improvement
Legal defense of intangible assets
Materiality
68
Q

Addition

A

Occurs when we add a new major component to an existing asset

69
Q

Improvement

A

The cost of replacing a major component of an asset

70
Q

Material

A

If it is large enough to influence a decision

71
Q

Accumulated depreciation

A

The depreciation that accumulates each year recorded as a contra asset account

72
Q

Book value

A

Equals the original cost of the asset minus the current value in accumulated depreciation

73
Q

Service life

A

(Useful life) how long the company expects to receive benefits from the asset before disposing of it

74
Q

Residual value

A

(Salvage value) the value the company expects to receive from selling the asset at the end of its service life

75
Q

Is land depreciated

A

NO

76
Q

Straight line depreciation method

A

Takes an equal amount of depreciation each year

- most common

77
Q

Declining balance depreciation method

A

An accelerated method, more depreciation expense is taken in the early years than in the later years of an assets life.
- used in calculating depreciation for tax purposes

78
Q

Activity based depreciation method

A

Calculates depreciation based on the use of the asset

- commonly used by companies that depend heavily on natural resources

79
Q

Depreciable cost

A

The assets cost minus it’s estimated residual value

80
Q

Accelerated depreciation method

A

Higher depreciation in the earlier years, lower in the later years

81
Q

Both declining balance and straight line will result in

A

The same total depreciation over the assets service life

82
Q

A simple way to get the depreciation rate for a double declining balance is to divide 2 by the estimated service life

A

.

83
Q

Amortization

A

Allocating the cost of intangible assets to expense

- we do not amortize intangible assets with indefinite useful lives (ex: goodwill)

84
Q

Exchange

A

Two companies trade assets

85
Q

Gain

A

Credit balance (revenue)

86
Q

Loss

A

debit balance

Expense

87
Q

Return on assets

A

Net income divided by average total assets

88
Q

Profit margin

A

Net income divided by net sales

89
Q

Asset turnover

A

Net sales/ average total assets

90
Q

Impairment

A

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

91
Q

Big bath

A

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

92
Q

Characteristics of liabilities

A

Probable future sacrifices of economic benefits
Arising from present obligations to other entities
Resulting from past transactions or events

93
Q

Operating cycle

A

The time it takes to produce revenue

94
Q

It’s more preferable to report a liability as a

A

Long term

95
Q

Interest

A

Face value x annual interest rate x fraction of the year

96
Q

Notes payable corresponds to

A

Interest expense

97
Q

Notes receivable corresponds to

A

Interest revenue

98
Q

Line of credit

A

An informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork

99
Q

Commercial paper

A

Borrowing from another company rather than from a bank

100
Q

FICA taxes

A

Based on the federal insurance contributions act; tax withheld from employees pay checks and matched by employers for social security and Medicare

101
Q

Unemployment taxes

A

A tax to cover federal and state unemployment costs paid by the employer on behalf of its employees

102
Q

Fringe benefits

A

Additional employee benefits paid for by the employer

103
Q

Deferred revenue

A

Is a liability not a revenue account

104
Q

Sales tax payable

A

Sales tax collected from customers by the seller, representing current liabilities payable to the government

105
Q

Current portion of long term debt

A

Debt that will be paid within the next year

106
Q

Long term obligations (notes, mortgages, bonds) are reported as

A

Current liabilities when they become payable

107
Q

Contingencies

A

Uncertain situations that can result in a gain or a loss for a company

108
Q

Contingent liability

A

An existing uncertain situation that might result in a loss

- lawsuits, product warranties, environmental problems, premium offers

109
Q

When is a contingent liability recorded

A

Only if a loss is probable and the amount is reasonably estimable

110
Q

Contingent gain

A

An existing uncertain situation that might result in a gain

111
Q

When do we record contingent gains

A

Not until the gain is certain

112
Q

Liquidity

A

Having sufficient cash (or other assets convertible to cash in a short time) to pay currently maturing debts

113
Q

Working capital

A

The difference between current assets and current liabilities

114
Q

Current ratio

A

Current assets/current liabilities

115
Q

Acid test ratio

A

(Quick ratio) measures the availability of liquid current assets
= cash+current investments+accounts receivable/ current liabilities

116
Q

Quick assets

A

Includes only cash, current investments, and accounts receivable

117
Q

Debt covenant

A

An agreement between a borrower and a lender requiring certain minimum financial measures be met or the lender can recall the debt

118
Q

Accounts receive able

A

The amount of cash owed to a company by its customers

Accounting 201 (2 decks)

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