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