Accounting Exam 2 Ch. 5-8

Lower-of-cost-or-market

A basis where by inventory is stated at the lower of either its cost or its market value as determined by current replacement.

NSF Check

A check that is not paid by a bank because of insufficient funds in a bank account.

Electronic funds transfer

A disbursement system that uses wire telephone, or computer to transfer cash from one location to another.

Allowance Method

A method of accounting for bad debts that involves estimating noncollectable accounts at the end of each period.

Cash Budget

A projection of anticipated cash flows, usually over a one-to-two-year period.

Inventory Turnover

A ratio that indicated the liquidity of inventory by measuring the number of times average inventory sold during the period; computed dividing cost of goods sold by the average inventory during the period.

Aging the accounts receivable

A schedule of customers balances classified by the length of time they have been unpaid.

Promissory Note

A written promise to pay a specified amount of money on demand or at a definite time.

Internal control

All the related methods and measures adopted within an organization to safeguard assets and enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations.

Receivables

Amounts due from individuals and companies that are expected to be collected in cash.

Specific Identification Method

An actual physical flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.

Bad Debt Expense

An expense account to record losses from extending credit.

First-in, First-out (FIFO)

An inventory costing method that assumes that the earliest goods purchases are the first to be sold.

Last-in, First-out(LIFO)

An inventory costing method that assumes that the last units purchases are the first to be sold.

Average-cost Method

An inventory costing method that uses weighted -average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold.

Weighted-Average Unit Cost

Average cost that is weighted by the number of units purchases at each unit cost.

Outstanding Checks

Checks issued and recorded by a company that have not been paid by the bank.

Treasurer

Employee responsible for the management of company cash.

LIFO reserve

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO.

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party.

Just-in-Time Inventory

Inventory system is which companies manufacture or purchase goods just in the time for use.

Sarbanes-Oxley Act (SOX)

Law that requires publicly traded companies to maintain adequate systems of internal control.

Finished Goods Inventory

Manufactured items that are completed and ready for sale

Days in Inventory

Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover.

(Other) Trade Receivables

Notes and accounts receivable that results from sales transactions.

Current replacement cost

The cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities

Payee

The party to whom payment of a promissory note is to be made.

Work in progress

The portion of manufactured inventory that has begun the production process but is not yet complete.

Fraud Triangle

The three factors that contribute to fraudulent activity by employees: authority, financial pressure, and rationalization

Net Sales

When the company deducts sales returns and allowances and sales discounts from sales revenue in the income statement.

Fraud

a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Dishonored note

a note that is not paid in full at maturity

Concentration of credit risk

a threat of nonpayment from a single large customer or class or customers that could adversely affect the financial health of the company.

Accounts Receivable

amounts customers owe on account.

Voucher

an authorization from prepared for each expenditure in voucher system.

Petty cash fund

cash fund used to pay for relativity small amounts.

Restricted Cash

cash that is not available for general use but rather is restricted for a special purpose.

Periodic Inventory System

companies do not keep detailed inventory records of the goods on hand throughout the period.

Gross Profit Rate

companies gross profit may be expressed as a percentage by dividing the amount of gross profit by net sales.

Perpetual Inventory System

companies maintain detailed records of the cost of each inventory purchase and sale.

Internal auditors

company employees who continuously evaluate the effectiveness of the companies internal control systems.

Deposits in transit

deposits recorded by the depositor that have not been recorded by the bank.

Gross Profit

excess of the net sales over cost of goods sold. Sales Revenue - COGS = Gross Profit

Purchase Inventory

indicates the total purchase price and other relevant information.

Bonding

involves obtaining insurance protection against theft by employees.

Purchase Allowance

keep the merchandise and get a reduction on the price.

Percentage-of-receivables basis

management establishes a percentage relationship between the amount of receivables and expected losses from noncollectable accounts.

Contra Revenue Account

means it is offset against a revenue account on the income statement.

Average collection period

measures the average amount of the time that a recievable is outstanding.

Profit Margin

measures the percentage of each dollar of sales that results in net income.

Accounts Receivable turnover

net credit sales / Avg. net A.R.

Voucher System

network of approvals by authorized individuals, acting independently, to ensure that all disbursements by check and proper.

FOB(free on board) Shipping Point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB destination

ownership of the goods remains with the seller until the goods reach the buyer.

Sales Invoice

provides support for each sale.

Purchase Discount

purchaser saves money, and the seller is able to shorten the operating cycle by converting the accounts receivable into cash earlier.

Net purchases

purchases - purchase returns and allowances and discounts = net purchases

Purchase Return

return of the goods.

Sales Discount

seller may pay offer the customer a cash discount for the prompt payment of the balance due.

Bank Statement

shows its bank transactions and balances.

Sales Revenue

source of revenues for merchandising companies is the sale of merchandise, sales.

Raw Materials

the basic goods that will be used in production but have not been placed into production

Freight-Out

the company that is selling pays for shipping.

Cash (net) realizable value

the net amount a company expects to receive in cash from receivables.

Maker

the party in a promissory note who is making to promise to pay.

Bank Reconciliation

the process of comparing the banks balance with the companies balance, and explaining the differences to make them agree.

Cost of Goods Sold

total cost of merchandise sold during the period.

Sales returns and allowances

transactions where the seller either accepts goods back from a purchases or grants them a reduction in the purchase price so they will keep the goods.

Direct write-off Method

when a company determines receivables from a particular company to be noncollectable, it charges the loss to the Bad Debt Expense.

Notes Receivable

written promise for amounts to be received.

Freight-In

you pay the freight charges.