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ACCT110 Ch 5 & 6

Accounting for Merchandising Ops & Inventories and Cost of Sales

TermDefinition
Acid-test ratio Ratio used to assess a company’s ability to settle its current debts with its most liquid assets; defined as quick assets (cash, shortterm investments, and current receivables) divided by current liabilities.
Cash discount Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.
Cost of goods sold Cost of inventory sold to customers during a period; also called cost of sales.
Credit memorandum Notification that the sender has credited the recipient’s account in the sender’s records.
Credit period Time period that can pass before a customer’s payment is due.
Credit terms Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future.
Debit Memorandum Notification that the sender has debited the recipient’s account in the sender’s records.
Discount Period Time period in which a cash discount is available and the buyer can make a reduced payment.
EOM Abbreviation for end of month; used to describe credit terms for credit transactions.
FOB Abbreviation for free on board; the point when ownership of goods passes to the buyer.
FOB shipping point (or factory) FOB shipping point (or factory) means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to carrier.
FOB destination FOB destination means the seller pays shipping costs and buyer accepts ownership of goods at the buyer’s place of business.
General and administrative expenses Expenses that support the operating activities of a business.
Gross margin / Gross profit Net sales minus cost of goods sold; also called gross margin.
Gross margin ratio Gross margin (net sales minus cost of goods sold) divided by net sales; also called gross profit ratio.
Inventory Goods a company owns and expects to sell in its normal operations.
List price Catalog (full) price of an item before any trade discount is deducted.
Merchandise / Merchandise inventory Goods that a company owns and expects to sell to customers; also called merchandise or inventory.
Merchandiser Entity that earns net income by buying and selling merchandise.
Multiple-step income statement Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses.
Periodic inventory system Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available.
Perpetual inventory system Method that maintains continuous records of the cost of inventory available and the cost of goods sold.
Purchase discount Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.
Retailer Intermediary that buys products from manufacturers or wholesalers and sells them to consumers.
Sales discount Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.
Selling expenses Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers.
Shrinkage Inventory losses that occur as a result of theft or deterioration.
Single-step income statement Income statement format that includes cost of goods sold as an expense and shows only one subtotal for total expenses.
Supplementary records Information outside the usual accounting records; also called supplemental records.
Trade discount Reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers.
Wholesaler Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.
Average cost / Weighted average Method to assign inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that sale.
Conservationism constraint Principle that prescribes the less optimistic estimate when two estimates are about equally likely.
Consignee Receiver of goods owned by another who holds them for purposes of selling them for the owner.
Consignor Owner of goods who ships them to another party who will sell them for the owner.
Consistency concept Principle that prescribes use of the same accounting method(s) over time so that financial statements are comparable across periods.
Days' sales in inventory Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by 365; also called days’ stock on hand.
First-in, first-out (FIFO) Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.
Gross profit method Procedure to estimate inventory when the past gross profit rate is used to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale.
Interim statements Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.
Inventory turnover Number of times a company’s average inventory is sold during a period; computed by dividing cost of goods sold by average inventory; also called merchandise turnover.
Last-in, last-out (LIFO) Method to assign cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.
Lower of cost or market (LCM) Required method to report inventory at market replacement cost when that market cost is lower than recorded cost.
Net realizable value Expected selling price (value) of an item minus the cost of making the sale.
Retail inventory method Method to estimate ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.
Specific identification Method to assign cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of inventory.
Weighted average Method to assign inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that sale.
Created by: slk