MGMT 200 CH. 5-8 Terms

FIFO

assumes first unit purchased are the first ones sold

LIFO

assumes last purchased are the first ones sold

Deferred Revenue

cash received in advance from a customer for products and services to be provided in the future

LIFO conformity rule

companies that use LIFO for tax-reporting must use LIFO for financial reporting too

Asset Disposal (Selling it)

For gain: debit cash, debit accumulated depreciation, credit equipment, and credit gan For loss: debit cash, debit accumulated depreciation, debit loss, and credit equipment

Straight line is used for

financial reporting

Notes Receivables

formal credit agreements evidenced by written debt instruments

Operating Income

gross profit - operating expenses

Gross Profit Ratio

gross profit / net sales

Land

has unlimited life; includes cost of land and the costs necessary to prepare the land

FIFO benefit

higher ending inventory, lower cost of goods sold, higher reported profit than LIFO

Profit margin

indicates the earnings per $ of sales

Inventory

items a company intends for sale to customers

Intangible Assets

lack of physical substance (ie: patents, copyrights, trademarks, franchises, goodwill)

Franchises

local outlets that pay for the exclusive right to use the franchises name and to sell its products

Equipment

machinery used; might include sales tax, shipping, assembly, and other prep costs

Specific Identification

matches each unit with its actual cost

Asset turnover

measures the sales per $ of assets invested

Receivables Turnover Ratio

net credit sales / (beg. AR + ending AR/2)

net income/average total assets

net income x average total assets

Return on assets (method 1)

net income/avg. total assets

Notes Payable

note signed by a firm promising to repay the amount borrowed PLUS interest

Book Value

original cost - accumulated depreciation

Long-Term Liabilities

payable in more than one year from the balance sheet date

Tangible Assets

physical substance (ie: land, land improvements, buildings, equipment, natural resources)

A contingent liability is recorded if a loss is...

probable and estimable

Return on assets (method 2)

profit margin x asset turnover

Basket Purchase

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

Manufacturing Inventory

raw materials, work in process, finished goods

Non-trade Receivables

receivables that originate from sources other than customers (ie: tax refunds, company loans, etc.)

Trade Discounts

reduction in list price *RECORD SALE AT LOWER/DISCOUNTED PRICE*

Sales Discount

reduction in price to be received from a credit IF customer collection occurs in a specific period

Liquidity

refers to having sufficient cash or other current assets to pay currently maturing debts

Accrued Revenue

revenue that has been earned but not yet collected

Gross Profit

revenues - cost of good sold

Sales Tax Payable

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

Net Income

Income Before Income Taxes - Income Taxes

Income Before Income Taxes

Operating Income - Other Income

Weighted-Average Cost

cost of goods available for sale / # of units available for sale

Research and Development

costs incurred to conduct research and develop a new product or process (considered as an INTANGIBLE ASSET)

Current Ratio

current asset/current liabilites

Working Capital

current assets - current liabilities

Uncollectible accounts

customer accounts are no longer considered receivable

Sales Allowances

customer does NOT return good seller still issues a cash refund or reduces accounts receivable

Sales Returns

customer returns previous purchase seller issues cash refund or seller reduces accounts receivable

LIFO benefit

tax savings

Operating Cycle

the length of time from spending cash to provide goods and services to a customer until correction of cash from that customer

Warranties

the most common example of a contingent liability; represents a liability for a company at the time of the sale IF it is probable and estimable; the cost can be estimated by past experiences, industry statistics, and current business conditions

Goodwill

the portion of the purchase price that exceeds the fair value of identifiable net assets

FOB destination

title passes when the buyer gets the inventory at their destination

FOB shipping point

title passes when the seller ships the inventory

Sales Tax

total cash paid - (total cash paid/1+sales tax rate)

Direct Write Off Method (not GAAP approved)

used for tax-reporting purposes; bad debts are ONLY written off when they actually become uncollectible

Current Liabilities

usually payable within a year from the balance sheet date

Merchandising Inventory

wholesaler or retailer

Trademarks

word, slogan, or symbol that identifies a company, product, or service; capitalize on legal, registration, and design fees (period of 10 year spans that are indefinite)

Discount terms x/y or n/30

x/y: x% discount if paid in y days n/x: full payment is due in x days

Materiality

an item is material if its large enough to influence a decision

Liabilities

an obligation of a company to transfer some economic benefit in the future

Contingent gains

an existing uncertain situation that might result in a gain; NOT RECORDED UNLESS IT IS CERTAIN

Contingent Liability

an existing uncertain situation that might result in a loss

Acid-Test Ratio

(cash + current investments + accounts receivable)/current liabilities

Depreciation Expense (straight line)

(cost - residual value)/service life

Natural Resources

(ie: oil, natural gas, timber, salt) recorded at COST + COSTS TO PREPARE RESOURCE FOR USE

Average Collection Period

365 / Receivables Turnover Ratio

Line of Credit

an informal agreement that permits a company to borrow up to a prearranged limit

Net Revenue

Total Revenue - (returns + allowances + discounts)

Contingencies

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

Percentage of Receivables Method

a method of estimating uncollectible accounts based on the percentage of accounts receivable that are not expected to be collected (sometimes called balance sheet method)

Tax depreciation

accelerated methods to reduce taxable income more in the early years of an asset's life

Fringe Benefits

additional employee benefits (ie: health, dental insurance, retirement, savings)

Amortization

allocating the cost of most intangible assets to expense

Depreciation

allocating the cost of most tangible assets to expense

Accounts Payable

amounts owed to suppliers of merchandise or services

Land Improvements

amounts spent to improve land; has LIMITED USEFUL LIVES and is recorded separately from the land account

Depreciation

an allocation of an assets cost to expense over time

Interest

base value x annual interest rate x time (months/12)

Aging Method

bases the bad debt expense on the various ages of individual accounts receivable, using a higher percentage for "old" accounts rather than "new" accounts

After acquisition, you can capitalize...

benefits future periods

After acquisition, you can expense...

benefits the current period

Commercial Paper

borrowing from another company, sold with maturities from 30-270 days, interest rate is typically lower than a bank loan

Purchase returns

buyer returns unwanted/defective inventory

Liquidity Management

can influence the ratios that measure liquidity (ie: delayed shipment, additional purchases late in the year)

Copyrights

exclusive rights of protection given to the creator of a work (granted for creator's lifespan PLUS 70 years)

Asset Disposal (Trading it)

debit (new) equipment, debit accumulated depreciation, credit cash, credit (old) equipment, credit gain

Asset Disposal (Retiring it)

debit accumulated depreciation, debit loss, credit equipment

Current Portion of long-term debt

debt that will be paid within one year from the balance sheet

Depreciable rate per unit (activity-based method)

depreciable cost/total units expected to be produced

Buildings

different from building a new building costs

Purchase discounts

discount offered by seller for quick payment

Basket Purchase Pricing

divide each fair value by sum of fair values, multiply each percentage by purchase price to find recorded amounts for each asset

employee contributions for benefits

employee

employee investments in retirement or saving plans

employee

employee portion of social security and medicare (FICA)

employee

federal and state income taxes

employee

employer contributions for benefits

employer

employer contributions to retirement and saving plans

employer

federal and state unemployment taxes

employer

matching portion of FICA

employer

Patents

exclusive right to manufacture a product or use a product (period of 20 years) when PURCHASING you capitalize on the purchase price and legal fees; when SELLING you capitalize on the legal fees only