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Chapter 5 Accounting

Cost of Goods Sold
The cost of the inventory that the business has sold to customers. Also called cost of sales.
Cost of Sales
The cost of the inventory that the business has sold to customers. Also called cost of goods sold.
Credit Terms
The terms of purchase or sale as stated on the invoice. A common example is 2/10, n/30
Customer
The individual or business that buys goods from a seller.
Free On Board
The purchase agreement specifies FOB terms to indicate who pays the freight. FOB terms also determine when title to the goods transfer to the purchaser.
FOB Destination
Situation in which the buyer takes ownership at the delivery destination point and the seller pays the freight.
FOB Shipping Point
Situation in which the buyer takes ownership to the goods at the shipping point and the buyer pays the freight.
Freight In
The transportation cost to ship goods INTO the warehouse; therefore, it is freight on purchased goods.
Freight Out
The transportation cost to ship goods OUT of the warehouse; therefore, it is freight on goods sold to a customer.
General Expenses
Expenses incurred that are not related to marketing the company’s products.
Gross Margin
Excess of net sales revenue over cost of goods sold. Also called gross profit.
Gross Margin Percentage
Gross profit divided by net sales revenue. A measure of profitability. Also called gross profit percentage.
Gross Profit
Excess of net sales revenue over cost of goods sold. Also called gross margin.
Gross Profit Percentage
Gross profit divided by net sales revenue. A measure of profitability. Also called gross margin percentage.
Income from Operations
Gross profit minus operating expenses. Also called operating income.
Inventory
All the goods that the company owns and expects to sell to customers in the normal course of operations.
Inventory Turnover
Ratio of cost of goods sold divided by average inventory. Measures the number of times a company sells its average level of inventory during a period.
Invoice
A seller’s request for cash from the purchaser.
Merchandisers
Businesses that sell merchandise, or goods, to customers.
Merchandising
Consists of buying and selling products rather than services.
Multi-Step Income Statement
Format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.
Net Purchase
Purchases less purchase discounts and purchase returns and allowances.
Net Sales Revenue
Sales revenue less sales discounts and sales returns and allowances.
Number of Days in Inventory
Ratio that measures the average number of days that inventory is held by a company.
Operating Expenses
Expenses, other than cost of goods sold, that are incurred in the entity’s major line of business. Examples include rent, depreciation, salaries, wages, utilities, and supplies expense.
Operating Income
Gross profit minus operating expenses. Also called income from operations.
Other Revenue and Expense
Revenue or expense that is outside the normal day-to-day operations of the business, such as a gain or loss on the sale of plant assets.
Periodic Inventory System
A system in which the business does not keep a continuous record of inventory on hand. At the end of the period, the business takes a physical count of on-hand inventory and uses this information to prepare the financial statements.
Perpetual Inventory System
The computerized accounting inventory system in which the business keeps a constant/running record of inventory and cost of goods sold.
Purchase Allowances
An amount granted to the purchaser as an incentive to keep goods that are not “as ordered.”
Purchase Discount
A discount that businesses offer to purchasers as an incentive for early payment.
Purchase Returns
A situation in which businesses allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable.
Sales
The amount that a merchandiser earns from selling its inventory. Short name for Sales revenue.
Sales Discount
Reduction in the amount of cash received from a customer for early payment. Offered by the seller as an incentive fro the purchasers to pay early. A contra account to Sales revenue.
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. A contra account to Sales revenue.
Sales Revenue
The amount that a merchandiser earns from selling its inventory. Also called Sales.
Selling Expenses
Expenses related to marketing and selling the company’s products.
Single-Step Income Statement
Format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.
Vendor
The individual or business from whom a company purchase goods. A merchandising company mainly purchases inventory from vendors.

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