Accounting Test 2 Chapter 5

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unearned revenue

income received but not yet earned (usually considered a current liability on a company's balance sheet)

wholesaler

an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.

retailer

an intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

Cost of Goods Sold account

represents the cost of the merchandise sold during the period to help earn revenue. Is presented as a separate expense item on the income statement.

Gross Profit or Gross Margin

Net Sales minus Cost of Goods Sold; the amount left, after subtracting the cost of the inventory sold, to cover all other expenses and a profit.

sales

instead of calling it fees earned or consulting revenue or something like that, we call it ________

Net Income

Gross Profit - Expenses ; From the Gross Profit, I subtract all my other operating expenses such as salaries expense, rent expense etc to get to my _________

The operating cycle for a merchandiser

the time it takes the business to start with cash, purchase inventory, sell the inventory, and finally collect the cash from customers.

The operating cycle...

_____ of a business that sells inventory on credit is typically longer than that of a business that sells only on a cash basis.

flow of costs in an inventory system

If we take what we start the period with (beginning inventory(=asset)) and add the net purchases during the period, we have the total merchandise available for sale during the period. At the end of the period, one of two things must happen to the merchandise available for sale.
It is either still in inventory or it is sold.
If it is in inventory, the cost will appear on the balance sheet as Ending Inventory. If it is sold, the cost will appear on the income statement as Cost of Goods Sold (=Expense).

Two alternative inventory accounting systems

perpetual system or periodic system

perpetual inventory system

continually updates accounting records for merchandising transactions. Most businesses use this inventory system.

periodic inventory system

updates the accounting records for merchandise transactions only at the end of a period.

net sales

sales minus any returns or discounts; Total sales less sales discount and sales returns and allowances

credit terms/Purchase discount terms

2/10, net 30 means that the buyer can reduce its price by 2% if it pays within 10 days, and net 30 means that the buyer must pay its bill within 30 days / description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future

Merchandise Inventory

an asset account that identifies the cost of goods a company has purchased that are available for sale to customers

Trade discounts

used by manufacturers and wholesalers to offer better prices for greater quantities purchased.

Purchase discounts

are provided to customers as an incentive for them to pay early. If payment is received during the discount period, a discount may be taken. If payment is made after the ___expires, then the full payment is due on or before the end of the credit period.

credit period

is the normal period of time the company allows for customers to extend their account receivable, typically 30 or 60 days.

discount period

much shorter period of time than credit period , typically 10 or 15 days.

purchase return

is the return of merchandise by the purchaser to the supplier.

allowance

is a price reduction granted to the customer because of some quality issue. _____may be given because of a slight defect in the merchandise or because a shipment was late.
In these cases, the customer keeps the merchandise and just receives a price reduction as the _____.

FOB terms

designate when title passes and who pays the transportation cost. Stands for Free On Board.

Free On Board shipping point

If the shipping terms are _______ that means that ownership transfers from the seller to the buyer when the seller provides the goods to the carrier. It also means that the buyer will pay the transportation cost. This transportation cost will be added to the merchandise inventory account.

Free On Board destination

If the shipping terms are _____ that means that ownership transfers from the seller to the buyer when the buyer receives the goods. It also means that seller will pay the transportation cost.

Sales discounts

____on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

credit memorandum

Issued by a supplier to a receiving business as notification that a specific amount has been subtracted from its amount due. This is usually issued for purchase returns or purchase allowances.

Physical Inventory Count

is usually performed at least once annually.

Shrinkage

term used to refer to the loss of inventory (theft or accounting errors) and it is computed by comparing a physical count of inventory with recorded amounts.

Acid-Test Ratio

a common ratio that is used to determine the liquidity of a company. In other words, this ratio determines if the company has enough liquid assets to pay current liabilities. The ratio is calculated as quick assets divided by current liabilities. A common rule of thumb is for ____ to be at least one point zero, but this can vary from industry to industry.

Quick assets

include cash, short-term investments and receivables.

Gross Margin Ratio

common ratio that calculates the percentage of dollar sales available to cover expenses and provide a profit.
This ratio is calculated as Gross Margin (Net Sales minus Cost of Goods Sold) divided by Net Sales.
In most cases, the higher this ratio is, the better.

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