Merchandise Inventory

Goods owned and held for resale to customers.

Operating Cycle of a Merchandiser

Purchasing merchandise, selling inventory, and collecting cash from customers.

Perpetual Inventory System

Updates accounting records continuously for every purchase and sale of inventory.

Periodic Inventory System

Updates accounting records for inventory and COGS only at the end of a period.

Credit Terms: 2/10, n/30

A 2% cash discount if paid within 10 days; full balance due in 30 days.

FOB Shipping Point

Buyer takes ownership during transit and pays transportation costs (Freight-In).

FOB Destination

Seller retains ownership until goods arrive at destination and pays freight costs.

Gross Profit Formula

Net Sales minus Cost of Goods Sold.

Inventory Shrinkage

Loss of inventory due to theft, breakage, or decay; recorded by adjusting inventory to physical count.

Acid-Test Ratio Formula

(Cash + Short-term Investments + Current Receivables) divided by Current Liabilities.

Gross Margin Ratio Formula

(Net Sales - COGS) divided by Net Sales.

Consigned Goods Treatment

Included in consignor's (owner's) inventory, never reported in consignee's inventory.

Damaged or Obsolete Goods Valuation

Reported at Net Realizable Value (sales price minus selling costs).

Total Inventory Cost Formula

Invoice cost minus discounts plus freight, storage, insurance, and import duties.

FIFO Method Effect

Assigns oldest costs to Cost of Goods Sold and recent costs to Ending Inventory.

LIFO Method Effect

Assigns recent costs to Cost of Goods Sold and oldest costs to Ending Inventory.

LIFO Conformity Rule

IRS requirement that using LIFO for tax reporting requires using LIFO for financial reporting.

Lower of Cost or Market (LCM/NRV)

Requirement to write inventory down to market/NRV value when lower than historical cost.

Inventory Turnover Formula

Cost of Goods Sold divided by Average Inventory.

Days' Sales in Inventory Formula

(Ending Inventory divided by COGS) multiplied by 365.

Internal Control System Purpose

Policies and procedures used to protect assets, ensure reliable accounting, uphold policies, and promote efficiency.

Sarbanes-Oxley Act (SOX) Requirement

Requires managers and auditors of public companies to document and certify internal controls.

COSO Five Components of Internal Control

Control environment, risk assessment, control activities, information & communication, and monitoring.

Separation of Recordkeeping from Custody

Internal control principle ensuring the person with access to an asset does not control its accounting records.

Bonding Key Employees

Purchasing an insurance policy against theft by employees who handle large amounts of cash.

Cash Equivalents Definition

Short-term, highly liquid investments readily convertible to known cash amounts near maturity.

Cash Over and Short Account

Income statement account used to record cash register overages (credited) or shortages (debited).

Voucher System

Control procedures for verifying, approving, and recording liabilities before issuing cash payment checks.

Establishing a Petty Cash Fund

Journal entry debiting Petty Cash and crediting Cash for the established amount.

Bank Reconciliation

Periodic process explaining differences between the bank statement cash balance and the company's book balance.

Days' Sales Uncollected Formula

(Accounts Receivable divided by Net Sales) multiplied by 365.