Accounting 230 Chapters 5,6,7

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Vocabulary for Test Prep

Contra revenue account

An account that is offset against a revenue account on the income statement.

Cost of goods sold

The total cost of merchandise sold during the period.

Gross profit

The excess of net sales over the cost of goods sold.

Gross profit rate

Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.

Net sales Sales less sales returns and allowances and sales discounts.

Sales less sales returns and allowances and sales discounts.

Periodic inventory system

An inventory system in which a company does not maintain detailed records of goods on hand and determines the cost of goods sold only at the end of an accounting period.

Perpetual inventory system

A detailed inventory system in which a company maintains the cost of each inventory item and the records continuously show the inventory that should be on hand.

Profit margin ratio

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales.

Purchase allowance

A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise.

Purchase discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Purchase invoice

A document that supports each purchase.

Purchase return

A return of goods from the buyer to the seller for cash or credit.

Quality of earnings ratio

A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income.

Sales discount

A reduction given by a seller for prompt payment of a credit sale.

Sales invoice

A document that provides support for each sale.

Sales returns and allowances

Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.

Sales revenue

Primary source of revenue in a merchandising company.

Average-cost method

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

Consigned goods

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

Current replacement cost

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

Days in inventory

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

First-in, first-out (FIFO) method

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

Finished goods inventory

Manufactured items that are completed and ready for sale.

FOB shipping point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

Inventory turnover ratio

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

Just-in-time (JIT) inventory

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

Last-in, first-out (LIFO) method

An inventory costing method that assumes that the latest units purchased are the first to be sold.

LIFO reserve

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

Lower-of-cost-or-market (LCM)

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

Raw materials

Basic goods that will be used in production but have not yet been placed in production.

Specific identification method

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

Weighted-average unit cost

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

Work in process

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

Bank reconciliation

The process of comparing the bank's account balance with the company's balance, and explaining the differences to make them agree.

Bank statement

A statement received monthly from the bank that shows the depositor's bank transactions and balances.

Bonding

Obtaining insurance protection against theft by employees.

Cash

Resources that consist of coins, currency, checks, money orders, and money on hand or on deposit in a bank or similar depository.

Cash budget

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

Cash equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash.

Deposits in transit

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

Electronic funds transfer (EFT)

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

Fraud

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

Fraud triangle

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

Internal auditors

Company employees who continuously evaluate the effectiveness of the company's internal control systems.

Internal control

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

NSF check

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

Outstanding checks

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

Petty cash fund

A cash fund used to pay relatively small amounts.

Restricted cash

Cash that is not available for general use but instead is restricted for a particular purpose.

Sarbanes-Oxley Act of 2002 (SOX)

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

Treasurer

Employee responsible for the management of a company's cash.

Voucher

An authorization form prepared for each expenditure in a voucher system.

Voucher system

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

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