Key Terms: Chapter Five

cash discount

A reduction in invoice price offered to customers to encourage prompt payment of invoices

cost of goods sold

The total cost attributed to units of inventory actually sold during a period

credit memorandum

A seller-prepared document evidencing an approved return of merchandise for credit against an account

debit memorandum

A purchaser-prepared document evidencing a return of merchandise to a seller

F.O.B. destination

Free on Board destination; meaning the transfer of ownership of inventory will occur when the goods reach their destination and the seller will incur the freight charges

F.O.B. shipping point

Free on Board shipping point; meaning the transfer of ownership of inventory will occur when the goods are shipped and the purchaser will incur the freight charges

goods available for sale

A calculated amount corresponding to the beginning inventory plus net purchases; represents the total pool of inventory available during a period from which sales can occur

gross method

A method of recording purchases of inventory at invoice price

gross profit

A calculated amount corresponding to net sales minus cost of goods sold

inventory

Goods held for resale to others

invoice price

List price less any trade discounts

list price

An establish price determined by reference to a catalog or general price list; before any discounts

multiple-step income statement

A complex income statement with sections that segregate cost of goods sold calculations and other components of income and expense; enables enhanced evaluations of data

net method

A method of recording purchases of inventory at invoice price less available cash discounts

operating expenses

General expense category for selling and administrative costs

periodic inventory system

An inventory system that utilizes a Purchases account and does not update inventory with each sale; inventory is updated by physical count at the end of accounting periods

perpetual inventory system

A "real-time" inventory system that updates inventory records with each purchase and sale

purchase discounts

A cash discount available on purchases of merchandise on account; encourages prompt payment

sales discounts

A cash discount offered to customers to encourage prompt payment of invoices

single-step income statement

A simple income statement with a section for all revenues and another for all expenses; there is no direct association between specific revenue and expense components

trade discount

A reduction from list price that is not entered in the accounting records; customarily offered in "setting" the invoice amount