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Accounting: Chapter 4-6

Income Statement
Reports revenues and expenses and calculates net income or net loss for the period.
Statement of Retained Earnings
Shows how Retained Earnings changed during the period due to net income (or net loss) and dividends.
Balance Sheet
Reports assets, liabilities, and stockholder’s equity as of the last day of the period.
Classified Balance Sheet
Each asset and each liability are placed into a specific category or classification.
A measure of how quickly an item can be converted to cash.
Current Asset
Assets that will be converted to cash, sold, or used up during the next 12 months or within the business’s operating cycle if the cycle is longer than a year.
Long-Term Asset
Assets that will not be converted to cash or used up within the business’s operating cycle or one year, whichever is greater.
Operating Cycle
The time span when:
1. Cash is used to acquire goods and services.
2. These goods and services are sold to customers.
3. The business collects cash from customers.
Long-Term Investment
Investments in bonds (debt securities) or stocks (equity securities) in which the company intends to hold the investment for longer than one year.
Debt securities
Equity securities
Plant Asset (also called Fixed Asset)
Long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business.
Intangible Asset
An asset with no physical form that is valuable because of the special rights it carries.
Current Liability
Must be paid either with cash or with goods and services within one year or within the entity’s operating cycle if the cycle is longer than a year.
Long-Term Liability
Does not need to be paid within one year or within the entity’s operating cycle, whichever is longer.
Closing Process
A step in the operating cycle. Journalizes and posts the closing entries to set the balances of the following accounts to zero for the ext period:
1. Revenues
2. Expenses
3. Income Summary
4. Divdends
Temporary Account
An account that is closed at the end of the period:
1. Revenues
2. Expenses
3. Income Summary
4. Dividends
Permanent Account
An account that is not closed at the end of the period:
1. Assets
2. Liabilities
3. Common Stock
4. Retained Earnings
Closing Entries
Transfers the the revenues, expenses, and dividends balances to the Retained Earnings account to prepare the company’s books for the next period.
Income Summary
Summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit). Its ending balance (net income or net loss) is then transferred (closed) to the Retained Earnings account (the final account in the closing process.
Post-Closing Trial Balance
Lists the balance of only Assets, Liabilities, Common Stock, and Retained Earnings accounts at the end of the period. Lists account balances after closing. (Permanent Accounts only)
Accounting Cycle
The process by which companies produce their financial statements for a specific period.
1. Start with the beginning account balances.
2. Analyze and journalize transactions as they occur.
3. Post journal entries to the accounts.
4. Compute the unadjusted balance in each account, and prepare the unadjusted trial balance.
5. Enter the unadjusted trial balance on the worksheet, and complete the worksheet. (optional)
6. Journalize and post adjusting entries.
7. Prepare the adjusted trial balance.
8. Prepare the financial statements.
9. Journalize and post the closing entries.
10. Prepare the post-closing trial balance.
Current Ratio
Measures the company’s ability to pay current liabilities form currents assets.
(Total current assets / Total current liabilities)
Reversing Entry
Switches the debit and the credit of a previous entry, is the exact opposite of the prior entry, and is dated the first day of the new period.
A business that sells merchandise, or goods, to customers.
Merchandise Inventory
The merchandise that a business sells to customers.
A merchandiser that buys goods from manufacturers and then sells them to retailers.
A merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to customers.
The individual or business form whom a company purchases goods.
Cost of Goods Sold (COGS)
The cost of the merchandise inventory that the business has sold to customers.
Gross Profit
Net Sales Revenue / Cost of Goods Sold
Operating Expenses
Expenses, other than COGS, that are incurred in the entity’s major ongoing operations.
Perpetual Inventory System
Keeps a running computerized record of merchandise inventory.
Periodic Inventory System
Requires businesses to obtain a physical count of inventory to determine quantities on hand.
A seller’s request for payment from the purchaser.
Purchase Discount
A discount that businesses offer to purchasers as an incentive for early payment.
Credit Terms
The payment terms of a purchase or sale as stated in the invoice.
Purchase Return
Sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable.
Purchase Allowance
An amount granted to the purchaser as an incentive to keep goods that are not “as ordered.”
FOB Shipping Point
The buyer takes ownership (title) to the goods after the goods leave the seller’s place of business (shipping point). In most cases, the buyer pays the freight.
FOB Destination
The buyer takes ownership (title) to the goods at the delivery destination point. In most cases, the seller also pays the freight.
Freight In
The transportation cost to ship goods into the purchaser’s warehouse; thus, it is freight on purchased goods.
Freight Out
The transportation cost to ship goods out of the seller’s warehouse and to the customer; thus, it is freight on goods sold.
Sales Revenue
The amount that a merchandiser earns from selling its inventory.
Sales Discounts
A contra account. Reduction in the amount of cash received from a customer for early payment.
Sales Returns and Allowances
Decreases in the seller’s receivable from a customer’s return of merchandise or from granting the customer an allowance from the amount owed to the seller.
Net Sales Revenue
The amount a company has earned on sales of merchandise inventory after returns, allowances, and discounts have been taken out.
Inventory Shrinkage
The loss of inventory that occurs because of theft, damage, and errors.
Single-Step Income Statement
Groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.
Multi-Step Income Statement
Contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.
Selling and Administrative Expenses
What are the 2 categories of Operating Expenses?
Selling Expenses
Expenses related to marketing and selling the company’s goods and services.
Administrative Expenses
Expenses incurred that are not related to marketing the company’s goods and services.
Operating Income
Measures the results of the entity’s major ongoing activities.
Other Revenues and Expenses
Revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense.
Income Tax Expense
Expense incurred by a corporation related to federal and state income taxes.
Gross Profit Percentage
Measures the profitability of each sales dollar above the cost of goods sold.
Net Purchases
Purchases — Purchase Returns and Allowances — Purchase Discounts.
Consistency Principle
A business should use the same accounting methods and procedures from period to period.
Disclosure Principle
A business’s financial statements must report enough information for outsiders to make knowledgeable decisions about the company.
Materiality Concept
A company must perform strictly proper accounting only for items that are significant to the business’s financial situation.
A business should report the least favorable figures in the financial statements when two or more possible options are presented.
Inventory Costing Method
A method of approximating the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory.
Specific Identification Method
Specific Identification Method
An inventory costing method based on the specific cost of particular units of inventory.
First-In, First-Out (FIFO) Method
The first costs into inventory are the first costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases.
Last-In, First-Out (LIFO) Method
The last costs into inventory are the first costs out to cost of goods sold. The method leaves the oldest costs—those of beginning inventory and the earliest purchases of the period—in ending inventory.
Cost of Goods Available for Sale
The total cost spent on inventory that was available to be sold during a period.
Weighted-Average Method
Based on the weighted average cost per unit of inventory that is calculated after each purchase.
Lower-of-Cost-or-Market (LCM) Rule
Rule that merchandise inventory should be reported in the financial statements at whichever is lower — its historical cost or its market value.
Inventory Turnover
Measures the number of times a company sells its average level of merchandise inventory during a period.
Days’ Sales in Inventory
Measures the average number of days that inventory is held by a company.
Income Summary
What account closes Revenues?
Credit Revenue, Debit Income Summary
How do we make Revenue accounts equal zero?
Income Summary
What account closes Expenses?
Debit Income Summary, Credit each individual Expense
How do we make Expense accounts equal zero?
Debit Income Summary, Credit Retained Earnings
How do we make the Income Summary account equal zero?
Debit Retained Earnings, Credit Dividends
How do we make the Dividends account equal zero?
Journal Entry
Lists the closing entries.
The information system that measures business activities, processes the information into reports, and communicates the results to decision makers.
Financial Accounting
Focuses on providing information for external decision makers.
Managerial Accounting
Focuses on providing information for internal decision makers.
Any person or business to whom a business owes money.
Financial Accounting Standards Board (FASB)
The private organization that oversees the creation and governance of accounting standards in the United States.
Securities and Exchange Commission (SEC)
U.S. governmental agency that oversees the U.S. financial markets.
Generally Accepted Accounting Principles (GAAP)
Accounting guidelines, currently formulated by FASB; the main U.S. accounting rule book.
Economic Entity Assumption
An organization that stands apart as a separate economic unit.
Sole Proprietorship
A business with a single owner.
A business with two or more owners and not organized as a corporation.
A business organized under state law that is a separate legal entity.
Limited-Liability Company (LLC)
A company in which each member is only liable for his or her own actions.
A person who owns stock in a corporation.
Separation of Ownership and Management
Stockholders own the business, but a board of directors—elected by the stockholders—appoints corporate officers to manage the business.
Corporate Taxation
Corporations are separate taxable entities. They pay a variety of taxes not paid by sole proprietorships or partnerships.
Federal and State Income Taxes
Corporate earnings are subject to double taxation.

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