Chapter 6 Inventories Average cost method inventory costing method that uses the weighted average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale Conservatism concept that dictates that when in doubt choose the method that will be least likely to overstate assets and net income Consigned goods goods held for sale by one party although ownership of the goods is retained by another party Consistency principle dictates that a company uses the same accounting principles and methods from year to year Current replacement cost the current cost to replace an inventory item Days in inventory measure of the average number of days inventory is held calculated as 365 divided by inventory turnover ratio Finished goods inventory manufactured items that are completed and ready for sale First in first out FIFO method inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold FOB free on board destination freight terms indicating that ownership of the goods remains with the seller until the goods reach the buyer FOB free on board shipping point freight terms indicating that ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller Inventory turnover a ratio that measures the number of times on average the inventory sold during the period computed by dividing cost of goods sold by the average inventory during the period Just in time JIT inventory method inventory system in which companies manufacture or purchase goods just in time for use Last in first out LIFO method inventory costing method that assumes the costs of the latest units purchased are the first to be allocated to cost of goods sold Lower of cost or market LCM basis a basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost Raw materials basic goods that will be used in production but have not yet been placed into production Specific identification method an actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory Weighted average unit cost average cost that is weighted by the number of units purchased at each unit cost Work in process that portion of manufactured inventory that has been placed into the production process but is not yet complete Chapter 7 Fraud Internal Control and Cash Bank reconciliation the process of comparing the bank s balance of an account with the company s balance and explaining any differences to make them agree Bank service charge a fee charged by a bank for the use of its services Bank statement a monthly statement from the bank that shows the depositor s bank transactions and balances Bonding obtaining insurance protections against misappropriation of assets by employees Cash resources that consist of coins currency checks money orders and money on hand or on deposit in a bank or similar depository Cash equivalents short term highly liquid investments that can be converted to a specific amount of cash Check a written order signed by a bank depositor directing the bank to pay a specified sum of money to a designated recipient Compensating balances minimum cash balances required by a bank in support of bank loans Deposits in transit deposits recorded by the depositor but not yet been recorded by the bank Electronic funds transfer EFT a disbursement system that uses wire telephone or computers to transfer funds from one location to another Fraud a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer Fraud triangle the three factors that contribute to fraudulent activity by employee opportunity financial pressure and rationalization Internal auditors company employees who continuously evaluate the effectiveness of the company s internal control system Internal control all of the related methods and activities adopted within an organization to safeguard its assets and enhance the accuracy and reliability of its accounting records NSF check a check that is not paid by a bank because of insufficient funds in a customer s bank account Outstanding checks checks issued and recorded by a company but not yet paid by the bank Petty cash fund a cash fun used to pay relatively small amounts Restricted cash cash that much be used for special purposes Sarbanes Oxley Act of 2002 SOX regulations passed by Congress to try to reduce unethical corporate behavior Voucher an authorization form prepared for each payment in a voucher system Voucher system a network of approvals by authorized individuals acting independently to ensure that all disbursements by check are proper Chapter 8 Accounting for Receivables Accounts receivable amounts awed by a customer on account Accounts receivable turnover ratio a measure of the liquidity of accounts receivable computed by dividing the net credit sales by average net accounts receivable Aging the accounts receivable the analysis of customer balances by the length of time they have been unpaid Allowance for doubtful accounts an account that shows the estimated amount of claims on customers that the company expects will become uncollectible in the future Allowance method a method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period Average collection period the average amount of time that a receivable is outstanding calculated by dividing 365 days by the accounts receivables turnover ratio Bad debts expense an expense account to record uncollectible receivables Cash realizable value the net amount a company expects to receive in cash Direct write off method a method of accounting for bad debts that involves expensing accounts at the time they are determined to be uncollectible Dishonored note a note that is not paid in full at maturity Factor a finance company or bank that buys receivables from businesses and then collects the payments directly from the customers Maker the party in a promissory note who is making the promise to pay Notes receivable claims for which formal instruments of credit are issued as proof of the debt Other receivables various forms of nontrade receivables such as interest receivable and income taxes refundable Payee the party to whom payment of a promissory note is to be made Percentage of receivables basis management estimates what
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