Ch 4 defintion:

Accounting Cycle
The sequence of steps in which an accounting information system captures,
processes, and reports a company's accounting transactions during a period.

Accrual Basis of Accounting

Records revenues when they are earned and records expenses when they are incurred.

Adjusting Journal Entries

Entries made in the general journal to record revenues that have been earned but not recorded
and expenses that have been incurred but not recorded.

Cash Basis of Accounting

Records revenues when cash is received and records expenses when cash is paid.

Closing Entries
Entries made in the journal and posted to the ledger that eliminate the balances in all temporary
accounts and transfer those balances to the retained earnings account.

Closing Process
The process of transferring all revenue, expense, and dividend account balances to the retained
earnings account.

Temporary Accounts
Accounts that accumulate balances only for the current period.

The Closing Process

-closing entries transfer net income/loss and dividends to RE
-must journalize and post closing entries
-temporary account (income summary) is used to close revenue and expense accounts

Temporary Accounts (Nominal)

-closed
-all revenue accounts, all expense accounts, dividends
Permanent Accounts (Real)
-not closed
-all assets, liabilities, SE

The Closing Process-Corporation

1) debit revenues for balance, credit income summary for total revenues
2) debit income summary for total expenses, credit each expense
3) debit (credit) income summary, credit (debit) RE for net income
4) debit RE for dividends, credit dividends for same amount

Posting Closing Entries

after closing entries posted:
-temporary accounts have a balance of zero
-balance in RE represents accumulated undistributed earnings at the end of the accounting
period

Post-Closing Trial Balance

-prepared after closing entries journalized and posted
-proves equality of permanent account balances

Steps in the Accounting Cycle

1) analyze business transactions
2) journalize the transactions
3) post to ledger accounts
4) prepare a trial balance
5) journalize and post adjusting entries: prepayments/accruals
6) prepare an adjusted trial balance
7) prepare financial statements: income statement, RE statement, balance sheet
8) journalize and post closing entries
9) prepare a post-closing trial balance

Classified Balance Sheet

-assets: current assets, long-term investments, P, P & E, intangible assets
-liabilities and SE: current liabilities, long-term liabilities, SE

Current Assets
-cash and other resources expected to be realized in cash, sold, or consumed within a year of
the date or within the company's operating cycle
-listed on balance sheet in order of liquidity
Long-Term Investments
-resources that can be converted to cash
-conversion not expected within one year of operating cycle, whichever is longer

Property, Plant, & Equipment

tangible resources of a relatively permanent nature used in business and not intended for sale
Intangible Assets
-non-current resources lacking physical substance
-ex. patents, trademarks, copyrights

Current Liabilities
-obligations expected to be paid from existing current assets or by creation of another current
liability
-within one year or the operating cycle, whichever is longer
-ex. A/P, interest payable, wages payable

Long-Term Liabilities
-obligations expected to be paid after one year or the operating cycle, whichever is longer
-ex. long term notes payable, bonds payable, mortgages payable, lease obligations

Stockholders' Equity
-corporation-common stock, RE
-proprietorship-owners capital
-partnership-partner one capital, partner two capital

Classified Balance Sheet

-helps determine availability of assets to meet debts as they come due
-helps determine the claims of short- and long-term creditors on total assets
-often in report form-assets above liabilities and SE

Ch 5 definition:
Authorization
The approval of transactions or activities.

Bank Statement
A report received from the bank detailing the transaction history of the bank account for a
defined period of time.
Bonding
The process of carefully checking an employee's background and insuring the company against
theft by that person.

Check
A written order to a bank to pay a stated amount to the person or business named on the face
of the check.

Check Authorization
A form an accounting department prepares that authorizes the issuance of a check to pay and
invoice.
Control Activities
Policies and procedures that management establishes to ensure that the objectives of internal
control are met.

Control Environment
A company's ethics, philosophy and operating style, organizational structure, method of
assigning authority and responsibility, and personnel policies and practices.

Cost of Goods Available for Sale

The sum of beginning inventory and the net cost of purchases during an accounting period.

Current Ratio
The ratio of current assets to current liabilities; calculated as Current Assets divided by Current
Liabilities.

Delivery Expense
The transportation cost of delivering merchandise. Also called Freight Out.

Exchange Gain or Loss

A gain or loss due to exchange rate fluctuation, which is reported on the income statement.

Financing Period
The amount of time from the purchase of inventory until it is sold and payment is collected,
less the amount of time creditors give the company to pay for the inventory.

FOB Destination
A term indicating that the seller retains title to the merchandise at the shipping point and
bears the shipping cost.
Freight In
The transportation cost of receiving merchandise.

Information and Communication

A component of internal control that refers to the way in which the accounting system gathers
and treats information and how it communicates responsibilities within the system.

Internal Controls
The systems and procedures that management uses to rotect a company's assets.

Invoice
A form that a vendor sends to a purchaser describing goods delivered and the quantity, price,
and terms of payment.

Merchandise Inventory
The goods on hand at any one time that are available for sale to customers.

Merchandising Business
A business that earns income by buying and selling goods.

Monitoring
Management's regular assessment of the quality of internal control

Net Purchases
Total purchases less any deductions, such as purchases returns and allowances and discounts
on purchases.

Operating Cycle
A series of transactions that includes purchases of merchandise inventory for cash or on credit,
payment for purchases made on credit, sales of merchandise inventory for cash or on credit,
and collection of cash from credit sales.

Periodic Independent Verification

A periodic check of records against assets by someone other than the person responsible fo
accounting records and assets.

Periodic Inventory System

A system for determining inventory on hand by periodically taking a physical count.
Perpetual Inventory System
A system for determining inventory on hand by keeping continuous records of the quantity
and, usually, the cost of individual items as they are bought and sold.

Physical Controls
Controls that limit access to assets.

Physical Inventory
An actual count of all merchandise on hand.

Purchase Order
A form tha a company's purchasing department sends to a vendor descri bing the items
ordered and the quantity, price, terms, and shipping date.

Purchase Requisition
A formal written request for a purchase that a company's credit office, or the requesting
department, sends to the purchasing department.

Purchases Account
A temporary account used under the periodic inventory system to accumulate the cost of
merchandise purchased for resale during an accounting period.

Purchases Discount
Discounts that buyers take for early paymet of merchandise; the Purchases Discounts account
is a contra-purchases account used under the periodic inventory system.

Purchases Returns and Allowances Account

A contra-purchases account used under the periodic inventory system to accumulate cash
refunds, credits on account, and other allowances made by suppliers.

Receiving Report
A form on which an employee in a company's receiving department notes the quantity, type of
goods, and their condidtion upon delivery from the vendor.

Risk Assessment
The identification of areas in which risk of loss of assets or inaccuracies in accounting records
is high.

Sales Discount
A discount given to a buyer for early payment of a sale made on credit; the Sales Discounts
account is a contra revenue account.
Sales Returns and Allowances Account
A contra revenue account used to accumulate cash refunds, credits on account, and other
allowances made to customers who have received defective or therwise unsatisfactory
products.

Seperation of Duties
No one person can authorize transactions, handle assets, or keep records of assets.

Trade Discount
A deduction, usually thirty percent or more, off a list or catalogue price, which is not recorded
in the accounting records.

Working Capital
The amount by which current assets exceed current liabilities.

What are Merchandising Companies?

Companies that buy and sell goods (rather than sell services)

Ch 6 definition:
Accrual basis of accounting
Reporting income when earned and expenses when incurred.

adjusted trial balance

A trial balance prepared after adjusting entries are posted.

adjusting entries
Journal entries recorded to update general ledger accounts at the end of a fiscal period.

adjustments
Changes recorded on a work sheet to update general ledger accounts at the end of a fiscal
period.

balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.

cash basis of accounting

Reporting income when the cash is received and expenses when the cash is paid.
certified public accountant (CPA)
An accountant who has passed the uniform certified public accounting exam and met the
licensing requirement for a state.

fiscal period
The length of time for which a business summarizes its financial information and reports its
financial performance.

fiscal year
A fiscal period consisting of 12 consecutive months.

income statement
A financial statement showing the revenue and expenses for a fiscal period.

net income
The difference between total revenue and total expenses when total revenue is greater.

net loss
The difference between total revenue and total expenses when total expenses are greater.

prepaid expense
Cash paid for an expense in one fiscal period that is not used until a later period.

trial balance
A proof of the equality of debits and credits in a general ledger.

work sheet
A columnar accounting form used to summarize the general ledger information needed to
prepare financial statements.

Comparable store sales

comparison of sales figures at established stores with existing "track records"

Contra-revenue account
a debit balance account that is offset against revenue in the income statement. Ex. Sales discounts,
Sales returns, Allowances

consistency (in inventory valuation )

and accounting principle that calls for the use of the same method of inventory pricing from year-to-
year with full disclosure of the effects of any change in method.
Cost of Goods Sold
the cost to a merchandising company of the goods it has sold to its customers during a period

Gross Profit
net sales revenue minus the cost of goods sold

cost flow assumption

assumption as to the sequence in which units are removed from inventory for the purpose of sale. Not
required to paralleled the physical movement of merchandise if units are homogenous

Gross Profit Margin

gross profit expressed as a percentage of net sales

cost layer
units of merchandise acquired at the same unit cost.comp

average-cost method
a method of valuing all units in inventory at the same average per unit cost

Inventory
merchandise intended for resale to customers

Inventory Shrinkage
the loss of merchandise through such causes as shoplifting, breakage, spoilage

Net Sales
gross sales revenue less sales returns and allowances and sales discount. First figure shown in
income statement

Operating cycle
the repeating sequence of transactions by which a business generates its revenue and cash receipts
from customers

Periodic Inventory System

eliminates the need for recording the CGS as sales occur. Amount of inventory and CGS are not
known until a complete physical inventory at year-end

Perpetual Inventory System

Accounting for merchandise transactions in which the inventory and CGS are kept perpetually up to
date

Point of Sale (POS) terminal

electronic cash registers for computer based processing of sales transactions. identifies each item of
merchandise from bar code automatically updating sales and inventory. Used for high volume low

cost merchandise.
sales per square foot of selling space
measure of efficient use of available space

special journal
accounting record for recording large numbers of a type of transaction quickly and efficiently

subsidiary ledger
ledger contain separate accounts for each item making up balance of control account in general
ledger. Account balances in subsidiary= balance in general ledger control account

taking a physical inventory

the procedure of counting all merchandise on hand and determining its cost

accounts receivable turnover rate

ratio used to measure the liquidy of Accounts Receivable and the reasonableness of the accounts
receivable balance. computed by dividing sales by average receivables.

allowance for doubtful accounts

A valuation account or contra-asset account relating to Accounts Receivable and showing the portion
of the receivables estimated to be uncollectible.

Bank reconciliation
an analysis that explains the difference between the balance of cash shown in the bank statement
and the balance of cash shown in the depositors records.

financial assets
cash and assets convertible directly into known amounts of cash.

gain
an increase in owners equity resulting from a transaction other than earning revenue or
investment by the owners. the most common example is the sale of an asset at a price above
book value.

line of credit
a prearranged borrowing agreement in which a bank stands ready to advance the borrower
without delay any amount up to a specified credit limit. once used, a line of credit becomes a
liability. the unused portion of the line represents the ability to borrow cash without delay.
loss
a decrease in owners equity resulting from any transaction other than an expense or a
distribution to the owners. the most common example is the sale of an asset at a price below
book value

marketable securities
highly liquid investments, primarily in stocks and bonds, that can be sold at quoted market
prices in organized security exchanges.

net realizable value

the balance sheet valuation standard applies to receivables. equal to the gross amount of
accounts and notes receivable, less an estimate of the portion that may prove to be
uncollectible.

NSF check
a customers check that was deposited but returned because of lack of funds in the account on
which the check is drawn.

shrinkage losses
losses of inventory due to theft spoilage or breakage

specific identification
recording as the cost of goods sold the actual costs of the specific units sold. necessary if each
unit in inventory is unique.

write down(of an asset)

a reduction in the carrying amount of an asset because it has become obsolete or its
usefulness has otherwise been impaired.

gross profit method

a method of estimating the cost of the ending inventory based on the assumption that the rate
of gross profit remains approximate the same from year to year

ch 7 definition:
budget
A financial road map used by individuals and companies as a guide for spending and saving.

comparative financial statements

Financial statements that provide information for multiple fiscal periods.
deficit
A negative balance that remains after total expenses are subtracted from total income.

financial accounting
The area of accounting which focuses on reporting information to external users.

financial ratio
A comparison between two components of financial information.

interim financial statements

Financial statements providing information for a time period shorter than the fiscal year.

managerial accounting
The area of accounting which focuses on reporting information to internal users.

pay yourself first

A budgeting strategy of setting aside at least 10% of after-tax income for saving and investing.

ratio analysis
The calculation and interpretation of a financial ratio.

return on sales
The ratio of net income to total sales.

stakeholders
Any persons or groups who will be affected by an action.

surplus
A positive balance that remains after total expenses are subtracted from total income.

vertical analysis
Reporting an amount on a financial statement as a percentage of another item on the same
financial statement.

Accounts Receivable
Short term financial assets that arise from sales on credit at the wholesale or retail level.

Accounts Receivable Aging Method

A method of estimating Uncollectible Accounts based on the assumption that a predictable proportion
of each dollar of accounts receivable outstanding will not be collected.
Aging of Accounts Receivable
The process of listing each customer's receivable account according to the due date of the account.

Allowance for Uncollectible Accounts

A contra asset account that reduces accounts receivable to the amount expected to be collected in
cash. Also called Allowance for Doubful Accounts and Allowance for Bad Debts.

Allowance Method
A method of accounting for uncollectible accounts by expensing estimated uncollectible accounts in
the priod in which the related sales take place.

Bank Reconciliation
The process of accounting for the difference between the balance appearing on a company's bank
statement and the balance in its Cash account.

Cash
Coins and currency on hand, checks and money orders from customers, and deposits in checking
and savings accounts.

Cash Equivalents
Short term investments that will revert to cash in 90 days or less from the time they are purchased.

Compensating Balance
A minimum amount that a bank requires a company to keep in its bank account as part of a credit
granting arrangement.

Contingent Liability
A potential liability that can develop into a real liability if a particular event occurs.

Days' sales uncollected

A ratio that shows on average how long it takes to collect accounts receivable; calculated as Days in
Year divided by Receivable Turnover.

Direct Charge Off Method

A method of accounting for uncollectible accounts by directly debiting an expense account when bad
debts are discovered; it violates the matching rule but is required for computing federal income tax.

Discounting
A method of selling notes receivable to a bank in which the bank derives its profit by deducting the
interest from the maturity value of the note.

Dishonored Note
A promissory note that the maker cannot or will not pay at the maturity date.
Electronic Funds Transfer
The transfer of funds from one bank to another through electronic communication.

Factor
An entity that buys accounts receivable.

Factoring
The sale or transfer of accounts receivable.

Imprest System
A system for controlling small cash disbursements by establishing a fund at a fixed amount and
periodically reimbursing the fund by the amount necessary to restore its original cash balance.

Interest
The cost of borrowing money or the return on lending money, depending on whether one is the
borrower or the lender.

Maturity Date
The date on which a promissory note must be paid.

Maturity Value
The total proceeds of a promissory note, meaning the face value plus interest, at the maturity date.

Notes Payable
Collecive term for promissory notes owed by the entity, otherwise known as the maker, who promises
payment to other entities.

Notes Receivable
Collective term for promissory notes held by the entity to whom payment is promised. This entity is
known as the payee.

Percentage of Net Sales Method

A method of estimating uncolletible accounts based on the assumption that a predictable proportion
of each dollar of sales will not be collected.

Promissory Note
An unconditional promise to pay a definite sum of money on demand or at a future date.

Receivable Turnover
A ratio for measuring the average number of times receivables are turned into cash during an
accounting period; calculated as Net Sales divided by Average Accounts Receivable.

Securitization
The grouping of receivables into batches for sale at a discount to companies and investors.
Short Term Financial Assets
Assets that arise from cash transactions, the investment of cash, and the extension of credit.

Trade Credit
Credit granted to customers by wholesalers or retailers.

Uncollectible Accounts
Accounts receivable owed by customers who cannot or will not pay. Also called Bad Debts.