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30 Cards in this Set
- Front
- Back
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current ratio |
current assets/current liabilities
rule of thumb says value should be at least 2.0 to avoid liquidity problems in the future |
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working capital |
current assets-current liabilities |
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acid test ratio
AKA quick ratio |
Quick Assets=Cash s/t investments current receivables
QUICK ASSETS/CURRENT LIABILITIES
rule of thumb- acid test ratio should have a value of at least 1.0 to avoid liquidity problems in the future |
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merchandise inventory |
goods a company owns and expects to sell to its customers |
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cash discounts |
reduction in a receivable or payable if it is paid within the discount period |
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sales discount |
seller's description of a cash discount granted to buyers in return for early payment |
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Purchase discount |
Purchaser's description of a cash discount received from a supplier of goods |
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Trade Discount |
Reduction below list or catalog price that is negotiated in setting the price of goods |
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credit period |
Time period that can pass before a customers payment is due |
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Discount period |
time in which a cash discount is available |
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FOB shipping point |
Buyer owns inventory in transit
buyer incurs cost, freight in |
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FOB destination |
Seller owns inventory in transit
seller incurs cost, freight out |
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cost of goods sold is a/an |
expense |
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perpetual |
-Continuous record of quantities -Cost of goods sold is accumulated as sales are made, costs are transferred from the merchandise inventory account to the cost of goods sold account -Fright in included in cost of goods sold -Cost of ending inventory is the balance of the merchandise inventory account |
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periodic |
-only ending inventory counted and priced FREIGHT IN IS NECESSARY COST -inventory+purchases=cost of goods available for sale
cost of goods available for sale minus ending inventory =cost of goods sold
-when u get inventory, debit purchases |
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net sales |
cash sales and credit sales minus cash refunds, credits on account, allowances and discounts |
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Gross Margin/Gross profit |
Difference between net sales and the cost of goods sold
net sales-cost of goods sold
gross margin/net sales= % |
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purchases returns and allowences |
contra purchases account carries a normal credit balance
it is deducted from PURCHASES to determine "net purchases" in the cost of goods sold calculation on the income statement |
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sales returns and allowences |
do not calculate cost of goods sold when sold so do not make entry to cost of goods sold when returned |
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Specific Identification |
used when company's inventory consists of many high priced items that are easy to differentiate |
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FIFO |
First in First out available-cost of goods sold= ending inventory 200 units @ 14 from purchase of June 25 2800 20 units @ 12.50 from purchase of June 6 +250 220 units ending inventory 3050 -------------------------------------------------------------------- Cost of goods available for sale 6350 Less June 30 inventory -3050 Cost of goods sold 3300 |
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LIFO |
Last in First out available-cost of goods sold= ending inventory 80 units@ 10 from June 1st inventory 800 140 units@ 12.50 from purchase of June 6 +1750 220 units in ending inventory 2550 -------------------------------------------------------------------- Cost of goods available for sale 6350 Less June 30 inventory -2550 Cost of goods sold 3800
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Weighted Average Cost |
Cost of goods available for sale /units available for sale
Ending inventory=units remaining x price
Cost of goods available for sale Less June 30 inventory --------------------------------------------- cost of goods sold
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Major reasons to select FIFO |
Practically- higher net income and earnings per share
Theoretically- best suited for the balance sheet because ending inventory is closest to current values |
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Major reasons to select LIFO |
Practically- play less income taxes in a period of rising prices
Theoretically- best suited for income statement because it matches revenues |
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consistency assumption |
requires all companies use the same accounting method year to year |
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LIFO conformity rule |
if company uses lifo for tax purposes, must use same method for financial reporting |
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gross profit method |
not acceptable for determining the cost of inventory for annual financial statements
step 1: determine cost of goods available for sale step 2: estimate the cost of goods sold for period step 3: "Plug" the estimated cost of the ending inventory |
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inventory turnover |
cost of goods sold/average inventory (Beginning of year + End of year |
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Number of days supply of inventory on hand |
365 days in a year/inventory turnover |
