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ACCT 200

Financial Accounting Exam II Terms (Ch 4-7)

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, short-term 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) means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to carrier.
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 Net sales minus cost of goods sold; also called gross profit.
Gross margin ratio Gross margin (net sales minus cost of goods sold) divided by net sales; also called gross profit ratio.
Gross profit Net sales minus cost of goods sold; also called gross margin.
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 Goods that a company owns and expects to sell to customers; also called merchandise or inventory.
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 Method for assigning 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.
Conservatism 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 by using the past gross profit rate 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, first-out (LIFO) Method for assigning 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 for estimating 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 for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of inventory.
Weighted average Method for assigning 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.
Bank reconciliation Report that explains the difference between the book (company) balance of cash and the cash balance reported on the bank statement.
Bank statement Bank report on the depositor's beginning and ending cash balances, and a listing of its changes, for a period
Canceled checks Checks that the bank has paid and deducted from the depositor's account.
Cash Includes currency, coins, and amounts on deposit in bank checking or savings accounts.
Cash equivalents Short-term, investment assets that are readily convertible to a known cash amount or sufficiently close to their maturity date (usually within 90 days) so that market value is not sensitive to interest rate changes.
Cash Over and Short Income statement account used to record cash overages and cash shortages arising from errors in cash receipts or payments.
Check Document signed by a depositor instructing the bank to pay a specified amount to a designated recipient.
Check register Another name for a cash disbursements journal when the journal has a column for check numbers.
Committee of Sponsoring Organizations (COSO) Committee of Sponsoring Organizations of the Treadway Commission (or COSO) is a joint initiative of five private sector organizations and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.
Days' sales uncollected Measure of the liquidity of receivables computed by dividing the current balance of receivables by the annual credit (or net) sales and then multiplying by 365; also called days' sales in receivables.
Deposit ticket Lists items such as currency, coins, and checks deposited and their corresponding dollar amounts.
Deposits in transit Deposits recorded by the company but not yet recorded by its bank.
Discounts lost Expenses resulting from not taking advantage of cash discounts on purchases.
Electronic funds transfer (EFT) Use of electronic communication to transfer cash from one party to another.
Gross method Method of recording purchases at the full invoice price without deducting any cash discounts.
Internal control system All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.
Invoice Itemized record of goods prepared by the vendor that lists the customer's name, items sold, sales prices, and terms of sale.
Invoice approval Document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization.
Liquid assets Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.
Liquidity Availability of resources to meet short-term cash requirements.
Net method Method of recording purchases at the full invoice price less any cash discounts.
Outstanding checks Checks written and recorded by the depositor but not yet paid by the bank at the bank statement date.
Petty cash Small amount of cash in a fund to pay minor expenses; accounted for using an imprest system.
Principles of internal control Principles prescribing management to establish responsibility, maintain records, insure assets, separate recordkeeping from custody of assets, divide responsibility for related transactions, apply technological controls, and perform reviews.
Purchase order Document used by the purchasing department to place an order with a seller (vendor).
Purchase requisition Document listing merchandise needed by a department and requesting it be purchased.
Receiving report Form used to report that ordered goods are received and to describe their quantity and condition.
Sarbanes-Oxley Act Created the Public Company Accounting Oversight Board, regulates analyst conflicts, imposes corporate governance requirements, enhances accounting and control disclosures, impacts insider transactions and executive loans, establishes new types of criminal conduct, and expands penalties for violations of federal securities laws.
Section 404 (of SOX) requires management and the external auditor report on the adequacy of the company's internal control on financial reporting, which is the most costly aspect of SOX for companies to implement as documenting and testing important financial manual and automated controls require enormous efforts. also requires management to produce an “internal control report” as part of each annual SEC report that affirms “the responsibility of management for establishing and maintaining an adequate internal control structu
Signature card Includes the signatures of each person authorized to sign checks on the bank account.
Vendee Buyer of goods or services.
Vendor Seller of goods or services.
Voucher Internal file used to store documents and information to control cash disbursements and to ensure that a transaction is properly authorized and recorded.
Voucher register Journal (referred to as book of original entry) in which all vouchers are recorded after they have been approved.
Voucher system Procedures and approvals designed to control cash disbursements and acceptance of obligations.
Accounts receivable Amounts due from customers for credit sales; backed by the customer's general credit standing.
Accounts receivable turnover Measure of both the quality and liquidity of accounts receivable; indicates how often receivables are received and collected during the period; computed by dividing net sales by average accounts receivable.
Aging of accounts receivable Process of classifying accounts receivable by how long they are past due for purposes of estimating uncollectible accounts.
Allowance for Doubtful Accounts Contra asset account with a balance approximating uncollectible accounts receivable; also called Allowance for Uncollectible Accounts.
Allowance method Procedure that (a) estimates and matches bad debts expense with its sales for the period and/or (b) reports accounts receivable at estimated realizable value.
Bad debts Accounts of customers who do not pay what they have promised to pay; an expense of selling on credit; also called uncollectible accounts.
Direct write-off method Method that records the loss from an uncollectible account receivable at the time it is determined to be uncollectible; no attempt is made to estimate bad debts.
Interest Charge for using money (or other assets) loaned from one entity to another.
Maker of the note Entity who signs a note and promises to pay it at maturity.
Matching (expense recognition) principle Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.
Materiality constraint Prescribes that accounting for items that significantly impact financial statement and any inferences from them adhere strictly to GAAP.
Maturity date of a note Date when a note's principal and interest are due.
Payee of the note Entity to whom a note is made payable.
Principal of a note Amount that the signer of a note agrees to pay back when it matures, not including interest.
Promissory note (or note) Written promise to pay a specified amount either on demand or at a definite future date; is a note receivable for the lender but a note payable for the lendee.
Realizable value Expected proceeds from converting an asset into cash.
Created by: EdL
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