Term
Average Days in Inventory |
|
Definition
- Approximate number of days inventory is held
- Avg. Days Inventory=365/inventory turnover ratio
|
|
|
Term
|
Definition
Cost of inventory sold during that period. Reported in income statement |
|
|
Term
|
Definition
includes items a company intends for sale to customers |
|
|
Term
|
Definition
purchase inventories that are primarily in finished form for resale to customers. Only inventory |
|
|
Term
|
Definition
- manufacture the inventories they sell, rather than buying them in finished form.
- Inventory in 3 categories:
- Raw Materials
- Work-in-process
- Finished goods
|
|
|
Term
|
Definition
Costs of beginning inventory + additional purchases = cost of inventory |
|
|
Term
Specific Identification Method |
|
Definition
Method you might think of as the most logical. It matches (identifies) each unit of inventory with its actual cost |
|
|
Term
|
Definition
- "First-In, First-Out" the first units purchased (first in) are th first ones sold (first out).
- Most closely approximates actual physical flow of inventory
- During periods of rising costs, FIFO results in 1) higher ending inventory, 2) lower COGS, 3) higher reported profit than does LIFO
|
|
|
Term
|
Definition
- "Last-In, First-Out" the last units purchased (last in) are the first ones sold (first out).
- Primary benefit is Tax Savings
- When inventory costs rising, LIFO results in lowest amount of reported profits (taxable income)
|
|
|
Term
Weighted-Average Cost Method |
|
Definition
- both the cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale
- weight-avg. cost=total cost of goods for sale/# units available for sale
|
|
|
Term
|
Definition
- Requires that company using LIFO for tax reporting to also use LIFO for financial reporting.
- Companies must report difference in amount of inventory if it were to use FIFO
|
|
|
Term
|
Definition
Difference between ending balances of inventory using FIFO and LIFO |
|
|
Term
Perpetual Inventory System |
|
Definition
Continual tracking/recording of inventory |
|
|
Term
Periodic Inventory System |
|
Definition
Doesn't continually modify inventory amounts, but instead periodically adjusts for purchases and sales of inventory at the end of the reporting period, based on physical count of inventory |
|
|
Term
|
Definition
- FOB="freight on board"
- FOB Destination: title of inventory doesn't transfer to buyer until it has reached destination (seller pays shipping)
- FOB Shipping Point: title of inventory transfer when shipped (buyer pays shipping)
|
|
|
Term
|
Definition
- Freight charges on incoming shipments from suppliers
- We add the cost of freight-in to the balance of inventory
- When that inventory is sold, those freight charges become part of COGS
|
|
|
Term
|
Definition
Essentially sales discount from the buyers perspective. Buyer receives discount for paying within certain timeframe |
|
|
Term
|
Definition
Customer returns inventory |
|
|
Term
Multi-Step Income Statement |
|
Definition
Income statement reports multiple levels of income (or profitability) |
|
|
Term
|
Definition
Multi-step income begins by reporting that a company's
Gross Profit= (sales revenues) - (COGS) |
|
|
Term
|
Definition
Measures profitability from normal operations
Operating Income=(gross profit)-(operating expenses) |
|
|
Term
|
Definition
Income Before Taxes=(operating income)+(non-operatin revenues)-(non-operating expenses) |
|
|
Term
|
Definition
Difference between all revenues and all expenses for the period
Net Income=(income before income taxes)-(income tax expense) |
|
|
Term
|
Definition
Normally the market value of inventory is considered to be the replacement cost of the inventory |
|
|
Term
Lower-of-Cost-or-Market
(LCM) Method |
|
Definition
- Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value=replacement cost
- When market value<cost, we adjust down the balance of inventory from cost to MV.
|
|
|
Term
|
Definition
Shows # of times the firm sells its average inventory balance during a reporting period
Inventory Turnover Ratio=COGS/avg. inventory
Higher ratio is BETTER, indicates greater effectiveness |
|
|
Term
|
Definition
Measures the amount by which the sale priec of inventory exceeds its cost per dollar of sales
Gross Profit Ratio=gross profit/net sales |
|
|
Term
|
Definition
- Not a current asset
- Rule- we record long-term asset at cost + expenditures necessary to get asset ready for use
- Two Types:
- 1) Tangible Assests: visible
- 2) Intangible Assets: invisible
|
|
|
Term
|
Definition
- Record an expenditure as an asset (put on balance sheet rather than expense immediately)
- All costs needed to get the asset ready for its intended use
- Salvaged materials decrease cost of long-term asset
|
|
|
Term
|
Definition
Improvements to land such as sidewalks, driveways, etc. Any addition that imrpoves land, however these improvements DO depreciate |
|
|
Term
|
Definition
Refers to interest costs we add to the asset account rather than recording them as interest expense.
mathcing principle: expense are to be matched (included on same income statement as) the revenues they help to create |
|
|
Term
|
Definition
When a company purchases more than one asset at the same time for one purchase price |
|
|
Term
|
Definition
Assets like oil, salt, timber, etc. which we can use up or deplete |
|
|
Term
|
Definition
No physical substance, existence often based on a legal contract |
|
|
Term
|
Definition
- Exclusive right to manufacture a product or to use a process
- If purchased, record purchase price + other expenses
- If developed internally, expense R&D costs as it incurs them
|
|
|
Term
|
Definition
Exclusive right of protection given by the U.S. Copyright Office to the creator of a published work. Copyrights are protected by law and give creator exclusive right to reproduce/sell work for life of creator + 70 years |
|
|
Term
|
Definition
Word, slogan, or symbol that distinctively identifies a company, product or service |
|
|
Term
|
Definition
Local outlets that pa for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area |
|
|
Term
|
Definition
Represents the value of a company as a whole, over and above the value of its identifiable net assets
Goodwill=(Purchase Price)-(Fair value of identifiable net assets) |
|
|
Term
|
Definition
Expense these expenditures because they maintain a given level of benefits in the period incurred |
|
|
Term
|
Definition
Occurs when we add a new major component to an existing asset. Capitalize the cost of additions because they increase future benefits |
|
|
Term
|
Definition
Cost of replacing a major compenent of an asset.
Capitalize to equipment account |
|
|
Term
|
Definition
- Item is said to be material if it is large enough to influence a decision.
- Goods w/ value over cerain level
- if not, expense immediately
- if so, does it increase future benefits?
|
|
|
Term
|
Definition
Accounting definition=allocation of an asset's cost to an expense the cost of an asset over its service life
Allocation of the cost of a tangible asset over its service life |
|
|
Term
|
Definition
Contra asset account, meaning it reduces an asset account |
|
|
Term
|
Definition
Book Value=(original cost of asset)-(acumulated depreciation) |
|
|
Term
|
Definition
how long the company expects to receive benefits from the asset before disposing of it |
|
|
Term
|
Definition
salvage value, the amount the company expects to receive from the selling of the asset at the end of its service life |
|
|
Term
|
Definition
Allocate an equal amount of the depreciable cost to each year of the asset's service life
Depreciation Expense=depreciable cost/service life |
|
|
Term
|
Definition
An accelerated depreciation method. However, both it and straight-line method will result in same total depreciation
Double-Decling Method
Depreciation Rate=2/service life
Depreciation Expense=(book value)(depreciation rate) |
|
|
Term
|
Definition
Instead of measuring depreciation on time, we instead allocate an asset's cost based on its use
Depreciation Rate=depreciable cost/total units to be produced
Depreciation Expense=(depreciation rate)(# untis of activity) |
|
|
Term
|
Definition
Process through which we allocate natural resources |
|
|
Term
|
Definition
Allocating cost of intangible assets to expense
residual value of most intangible assets=0 |
|
|
Term
|
Definition
measure of profitability
ROA=net income/avg. total assets |
|
|
Term
|
Definition
Indicates the earnings per dollar of sales
Profit Margin=net income/net sales |
|
|
Term
|
Definition
Measures sales per dollar of assets invested
Asset Turnover=net sales/avg. total assets |
|
|
Term
|
Definition
- occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (BV=cost-accumulated depreciation)
- 1) If estimated that future cash flows are below book value, asset is impaired
- 2) Impairment Loss=(book value)-(fair value)
|
|
|
Term
|
Definition
Recording all losses in one year to make a bad year even worse |
|
|
Term
|
Definition
A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past |
|
|
Term
|
Definition
Payable within one year, and long-term liabilities are payable more than 1 year from now
Firms would rather repot liability as long-term (less risk) |
|
|
Term
|
Definition
When a company borrows cash from a bank, bank requires the firm to sign a note promising to repay the amount borrowed + interest, reports liabilty as "notes payable" |
|
|
Term
|
Definition
Interest=(Face value)(Annual interest rate)(fraction of the year)
-Record interest expense in the period in which we incur it, rather than in the period in which we pay it |
|
|
Term
|
Definition
An informal agreement that permits a company to borrow up to a prearranged limit w/o having to follow formal loan procedures and prepare paperwork
-works like a note payable except the company is able to borrow w/o having to go through procedures/paperwork |
|
|
Term
|
Definition
If a company borrows from another company, rather than from a bank, note is referred to as "Commercial Paper"
- Sold w/ maturitieis ranging from 30 to 270 days
- Since borrowing directly from another company, interest rate on commercial paper is usually lower than on a bank loan
|
|
|
Term
|
Definition
Named for Federal Insurance Contribution Act, collectively refers to Social Security and Medicare Taxes
7.65% |
|
|
Term
|
Definition
In addition to FICA, employer must also pay federal and state unemployment taxes on behalf of its employees |
|
|
Term
|
Definition
Additional employee benefits paid for by the employer.
Employers often pay for employees' insurance premiums, & make contributions to savings, retirement, etc.
Also includes extra benefits (free skiing if you work for a ski resort) |
|
|
Term
|
Definition
Current Liability
- Receive cash in advance (debit: cash, credit: unearned revenues)
- When revenues occur (debit: unearned revenues, credit: sales revenue)
|
|
|
Term
|
Definition
When a company collects the sales tax, increases (debits) cash and increases (credits) Sales Tax Payable
-sales taxes are not an expense; they are a liability |
|
|
Term
Current Portion of Long-Term Debt |
|
Definition
The amount to be paid within the next year. Important: provides info for management to budget cash flow and provides investors/lenders w/ info about liquidity (risk)
-reports as a current liability on balance sheet |
|
|
Term
|
Definition
|
|
Term
|
Definition
- May not be a liability, depends on whether an uncertain event that might result in a loss occurs or not
- Only recorded if: a loss is probable and the amount can be reasonably estimated
|
|
|
Term
|
Definition
An existing uncertain situation that might result in a gain, which often is the flip side of contingent liabilities
-we don't record contingent gains until they are certain |
|
|
Term
|
Definition
Refers to having sufficient cash (or other current asses convertible into ash in a relatively short time) to pay maturing |
|
|
Term
|
Definition
Working Capital=(current assets)-(current liabilities)
-Large positive working capital is an indicator of liquidity (whther the company will be able to pay its current debts) |
|
|
Term
|
Definition
Current Ratio=(current assets)/(current liabilities)
- Current Ratio > 1=acceptable level of liquidity
- Higher the ratio, greater the liquidity
- current ratio=1, current assets=current liabilities
- High ratio is better, however, not always apositive signal
- companies having difficulty collecting receivables or holding excessive inventory will also have higher current ratio.
|
|
|
Term
|
Definition
Acid-Test Ratio=(cash+current investments+accts receivable)/current liabilities
-quick ratio, similar to current ratioe, but based on more conservative measure of current assets available=>>"quick assets"/current liabilities |
|
|
Term
|
Definition
Includes only cash, current investments and accounts receivable.
-By eliminating current assets that are less readily available to convert into cash (inventory, prepaid expenses, etc.), the acid-test ratio may provide a better indication of a company's liquidity |
|
|