Accounting Test 2 (chapters 5, 6, 8, 9)

Periodic COGS

(Beginning Inventory + Purchases) - Ending Inventory

Direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible; BDE will show only actual losses from uncollectibles and AR is recorded at its gross amt without any adjustment for estimated losses for bad debts; BDE is recorded in a different period than when revenue is recorded; it reduces the usefulness of the IS and BS and is not GAAP approved

Purchase Return

A purchaser returning goods to the seller for credit if the sale was made on credit, or for cash refund if the purchase was cash

Units of Production

Actual number of Units Produced x Estimated Depreciation Cost per Unit; depreciation expense depends on units produced; the useful life of an asset is expressed in terms of the total units of production or the use expected from the asset

Historical Cost Principle

An accounting principle that states that companies record plant assets at their cost

Cash Equivalent Price

An amount equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable

Multiple-step income statement

An income statement that highlights the components of net income; net sales - COGS = gross profit, gross profit - operating expenses = income from operations, income from operations - results of nonoperating activities = net income

Single-step income statement

An income statement that subtracts total expenses from total revenues to determine net income; all data is either a revenue or an expense

Product/Inventorial Cost

Any cost we incur to get inventory to the desired location/condition

Equipment

Assets used in operations; cost includes cash purchase price, sales taxes, freight charges, insurance during freight paid by the purchaser and expenditures in assembling, installing, and testing the unit; cost determined by frequency of cost and the benefit period

Inventory Turnover Ratio

COGS/Average Inventory ; it tells us how many times we sold our average inventory in this one year period

Allowance Method for Estimating Uncollectible Accounts

Companies must look at Accounts Receivable balance and estimate how much of the balance won't be paid at the end of the period

Depreciable cost

Cost of asset - salvage value

Factors in computing depreciation

Cost, useful life, salvage value

additions and improvements

Costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the plant asset; debited to the plant asset affected; a capital expenditure

Revenue Expenditures

Costs not included in a plant asset account that are expensed immediately

Acquisition Cost

Costs that are normal and necessary to acquire an asset and get it to its preferred condition; includes purchase cost, freight, insurance, assembly costs, installation costs, testing/quality costs

Capital Expenditures

Costs that are not expensed immediately but are instead included in a plant asset account

Depreciation cost per unit

Depreciable cost / total units of activity

Straight-line method

Depreciation base x (1/Estimated Useful Life); does not match revenues in the period they occur; when companies expense an equal amount of depreciation each year of the asset's useful life

Depreciation expense

Depreciation cost per unit x units of activity during the year

Ordinary Repairs

Expenditures incurred to maintain the operating efficiency and expected productive life of the unit; debited to Maintenance and Repairs Expense as incurred

Buildings

Facilities used in operations; when purchased, costs are purchase price, closing costs, and real estate broker's commissions; when constructed, costs are contract price & interest costs plus payments made by the owner for architect's fees, building permits, and excavation costs

FOB Shipping Point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller; the buyer pays the freight costs

FOB Destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer; the seller pays the freight costs

Depreciation base

Historical Cost - Salvage Value

Book Value

Historical cost of an asset - accumulated depreciation; determined at the time of an asset's disposal in order to determine gain/loss

Accounts Receivable Turnover Ratio

Net credit sales/average net accounts receivable

Loss on disposal

Proceeds from the sale are less than the book value of the plant asset sold; debit cash and accumulated depreciation and loss on disposal

Gain on disposal

Proceeds from the sale exceed the book value of the plant asset; debit cash and accumulated depreciation

Plant Assets

Resources that have physical substance, are used in the resources of the business, and are not intended for sale to customers; these decline in service potential over their useful lives

Net Sales

Sales Revenue - (Sales Returns and Allowances + Sales Discounts)

Gross Profit

Sales Revenue - Cost of Goods Sold; represents merchandising profit, does not represent a measure of the overall profit

Land Improvements

Structural additions with limited lives that are made to land (a debit to Land Improvements)

Just-in-time Inventory Method

The method where companies manufacture/purchase goods only when needed; its success depends on reliable suppliers

Work in Progress Inventory

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

Obsolescence

The process by which an asset becomes out of date before it physically wears out

Depreciation

The process of allocating to expense the cost of a plant asset over its useful life in a rational and systematic manner; a cost allocation method designed to properly match expenses with revenues; applies to land improvements, buildings, and equipment; affects accumulated depreciation and depreciation expense

Nonoperating activities

The various revenues and expenses & gains and losses that are unrelated to the company's main line of operations

Cost

This includes all expenditures necessary to acquire goods and place them in a condition ready for sale

Sales Returns and Allowances

Transactions where the seller either accepts the goods back from a purchaser or grants a reduction in the purchase price (allowance) so that the buyer will keep the goods; a contra account to Sales Revenue

Purchase Discount

When the credit terms of a purchase permits the buyer to claim a cash discount for prompt payment; purchaser saves money and seller shortens operating cycle

receivable

a claim to cash

factor

a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers

moving-average method

a new average is computed after each purchase; cost of goods available for sale/units on hand

Purchase Allowance

a purchaser may choose to keep the merchandise if the seller is willing to grant a reduction of the purchase price

Disposal of Plant Assets

a sale (equipment is sold to another party), retirement (equipment is scrapped or discarded), or exchange (existing equipment is traded for new equipment)

aging of accounts receivable

a schedule that classifies customer balances by the length of time they have been unpaid; this accurately estimates the ending balance in the allowance account

Periodic Inventory System

a system where companies determine COGS only at the end of the accounting period; they determine COGS at the beginning, add it to COGS purchased, and subtract COGS on hand as determined by ending inventory

Perpetual Inventory system

a system where companies maintain detailed records of the cost of each inventory purchase & sale and determines COGS each time a sale occurs; example: car dealerships

notes receivables

a written promise to pay a specified amount of money at a particular future date; this happens when a cost is recurring, it's a large volume payment, or when a customer is risky; can be long-term or current

Comprehensive income

an income amount that includes excluded measures such as adjusting entries

Comprehensive income statement

an income statement that presents items that are not included in the determination of net income

Return on the assets

an overall measure of profitability: Net Income / Average Total Assets ; indicates the amount of net income generated by each dollar of assets

other receivables

any other type of claim to cash that isn't a trade receivables; examples are interest receivables, dividend receivables, insurance receivables, income tax refund receivables

Raw Materials

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

Goods Available for Sale

beginning inventory + purchases

Cost of land

cash purchase price, closing costs such as title and attorney's fees, real estate brokers' commissions, and accrued property taxes and other liens on the land assumed by the purchaser

Merchandising Companies

companies that buy and sell merchandise rather than perform services as their primary source of revenue

Retailers

companies that purchase and sell directly to consumers

Wholesalers

companies that sell merchandise to retailers

weighted-average unit cost

cost of GAFS/total units available for sale

Period Cost

costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued

Annual depreciation expense

depreciable cost / estimated useful life; depreciable cost x depreciation rate

Bad Debt Expense

expense associated with estimated uncollectible accounts receivable; uncollectible receivables are normal and necessary risks

Gross Profit Rate

gross profit/net sales ; helps companies decide if the prices of their goods are in line with changes in the cost of inventory

Asset turnover

helps users determine how effectively a company is generating sales from its assets; Net Sales / Average Total Assets ; the higher the asset turnover, the more efficient it is operating

Finished Goods Inventory

manufactured items that are completed and ready for sale

Quality of Earnings Ratio

net cash provided by operating activities/net income

Profit Margin

net income/net sales ; this measures the percentage of each dollar of sales that results in net income, helps companies decide if they are maintaining an adequate margin between sales & expenses

trade receivables

notes and accounts receivables that result from sales transactions

Sales Discount

offering the customer a cash discount; a contra revenue account to Sales Revenue

Advantages of leasing

reduced risk of obsolescence, little or no down payment, shared tax advantages, assets & liabilities not reported

Profit margin

tells how effective a company is in turning its sales into income; Net Income / Net Sales

Average-cost method

the cost-flow assumption that allocates the cost of GAFS on the basis of the weighted-average unit cost

FIFO method

the cost-flow assumption that states that the earliest goods purchased must be sold first; the cost of the earliest goods purchased are the first to be recognized in determining COGS, regardless of which units are actually sold first; ending inventory is determined by the most recent purchases

LIFO method

the cost-flow assumption that states that the latest goods purchased are the first to be sold/recognized when determining COGS; ending inventory is determined by the oldest purchases

Cost of Goods Sold

the total cost of merchandise sold during the period; (Beginning Inventory + Cost of Goods Purchased) - Ending Inventory

Cost Flow Assumptions

these assume flows of costs that may be unrelated to the actual physical flow of goods

accounts receivable

this arises due to what the company does for a living when a service/good has not been paid for; an oral promise to pay

Purchase Invoice

this indicates the total purchase price and other relevant information

Consigned Goods

to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods

Percentage-of-receivable basis

under this, management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts

Fair value

what a willing buyer and seller are willing to negotiate; appears when the asset is sold; helps calculate sale proceeds, which helps determine gain or loss on disposal

Allowance Method

A method of accounting for bad debts that estimates uncollectible accounts at the end of each period, which provides better matching of expenses with revenues on the income statement and ensures that receivables are stated at cash realizable value

Annual depreciation rate

100% / useful life

Average Collection Period

365/accounts receivable turnover

Days in Inventory Ratio

365/inventory turnover ratio ; it tells us on average how long the inventory sat as an asset before becoming COGS

Determining Inventory Quantities

1. taking a physical inventory of goods on hand 2. determining the ownership of goods

Lease

A contractual agreement in which the owner of an asset (lessor) allows another party (lesee) to use the asset for a period of time at an agreed price

Specific Identification Method

A cost-flow assumption method that requires that companies keep records of the original cost of each individual inventory item, identify which particular units are sold and which are still in ending inventory; made more possible with bar codes

Operating lease

A lease that allows the lesee to account for the transaction as a rental, with neither an asset nor a liability recorded

Capital lease

A lease where lesees show both the asset and the liability on the balance sheet; leased item as an asset, obligation owed as liability