CH 13 Financial Statements and Closing Procedures

gross profit percentage

reveals the amount of gross profit from each sales dollar; is calculated by dividing gross profit by net sales

classified financial statement

revenues, expenses, assets, and liabilities are divided into groups of similar accounts and a subtotal is given for each group; also called a multiple step income statement

multiple-step income statement

several subtotals are computed before net income is calculated

plant and equipment

An important category of long-term assets; consists of property that will be used in the business for longer than one year

single-step income statement

It lists all revenues in one section and all expenses in another section. Only one computation is necessary to determine the net income (Total Revenue − Total Expenses = Net Income).

long-term assets

Noncurrent assets

long-term liabilities

are debts of the business that are due more than one year in the future; include mortgages, notes payable, and loans payable

reversing entries

are made to reverse the effect of certain adjustments. This helps prevent errors in recording payments or cash receipts in the new accounting period.

current liabilities

are the debts that must be paid within one year. They are usually listed in order of priority of payment

current assets

consist of cash, items that will normally be converted into cash within one year, and items that will be used up within one year; usually listed in order of liquidity

current ratio

is a relationship between current assets and current liabilities that provides a measure of a firm's ability to pay its current debts; may also be compared to that of other firms in the same business.

working capital

is the difference between total current assets and total current liabilities. It is a measure of the firm's ability to pay its current obligations

liquidity

is the ease with which an item can be converted into cash

accounts receivable turnover

measures the reasonableness of accounts receivable outstanding, and can be used to estimate the average collection period of accounts receivable.

gross profit

on sales is the difference between the net sales and the cost of goods sold

inventory turnover

shows the number of times inventory is replaced during the accounting period