BAT4M Accounting Exam Review

1. Terms
Chapter 8:
Accounts receivable turnover: a ratio used to measure the liquidity of accounts
receivable & the reasonableness of the accounts receivable balance (net credit
sales/ average receivables)
Aging the accounts receivable: the process of classifying accounts receivable by
age groups such as current, past due 1-30 days, a step in estimating the
uncollectible portion of accounts receivable
Allowance for doubtful accounts: a valuation account or contra account relating
to accounts receivable and showing the portion of the receivables estimated to be
uncollectible
Conservatism: a traditional practice of resolving uncertainties by choosing an
asset valuation at the lower point of the range of reasonableness; designed to avoid
overstatement of financial strength and earnings
Contingent liability: a potential liability that either will develop into a full-fledged
liability or will be eliminated entirely by a future event
Contra-asset account: a ledger account that is deducted from or offset against a
related account in financial statements (e.g. Allowance for Doubtful Accounts,
Discounts on Notes Receivable)
Default: failure to pay interest or principal of a promissory note at the due date
Direct write-off method: a method of accounting for uncollectible receivables in
which no expense is recognized until individual accounts are determined to be
worthless (uncollectible accounts expense)
Discount on notes receivable: a contra-asset account representing any unearned
interest included in the face amount of a note receivable
Discounting notes receivable: selling a note receivable prior to its maturity date
Interest: a charge made for the use of money (principal x rate of interest x time)
Maker (of a note): a person or entity who issues a promissory note
Maturity date: the date on which a note becomes due and payable
Maturity value: the value of a note at its maturity date, consisting of principal plus
interest
Payee: the person named in a promissory note to whom payment is to be made
(creditor)
Three days grace: the extra three days added to the due date on all notes
Chapter 9:
Average-cost method: a method of inventory valuation in which weightedaverage unit cost is computed by dividing the total cost of goods available for sale
by the number of identical units available for sale
Consistency in inventory valuation: an accounting standard that calls for the
use for the same method of inventory pricing from year to year
FIFO method: a method of computing the cost of inventory and the cost of goods
sold based on the assumption that the first merchandise acquired is the first
merchandise sold; ending inventory consists of the most recently acquired goods
F.O.B. destination: a term meaning the seller bears the cost of shipping goods to
the buyers location

F.O.B. shipping point: the buyer of goods bears the cost of transportation from
the sellers location to the buyers location
Gross profit method: a method of estimating the cost of the ending inventory
based on the assumption that the rate of gross profit remains approximately the
same from year to year
LIFO method: a method of computing the cost of goods sold by use of the prices
paid for the most recently acquired units; ending inventory is based on prices of the
units first acquired
Perpetual inventory system: provides a continuous running record of the goods
on hand; as goods are sold their cost is transferred to a Cost of Goods Sold account
Physical inventory: a systematic count of all goods on hand
Retail method: a method of estimating inventory in a retail store based on the
assumption that the cost of goods on hand bears the same percentage relationship
to retail prices as does the cost of all goods available for sale to the original retail
prices
Specific identification method: a method of pricing inventory by identifying the
units in the ending inventory as coming from specific purchases
Chapter 10:
Amortization: the systematic write-off to expense off the cost of an intangible
asset over the periods of its economic usefulness
Book value: the cost of a plant asset minus the total recorded depreciation, also
known as the carrying value
Capital expenditure: a cost incurred to acquire a long-lived asset; an expenditure
that will benefit several accounting periods
Declining-balance depreciation: an accelerated method of depreciation in which
a rate is applied each year to the un-depreciated cost of the asset
Depletion: allocating the cost of a natural resource to the units removed as the
resource is mined, pumped, cut or otherwise consumed
Depreciation: the systematic allocation of the cost of an asset to expense over the
years of its estimated useful life
Goodwill: the present value of expected future earnings of a business in excess of
the earnings normally realized in the industry
Half-year convention: the practice of taking six months depreciation in the year
of acquisition and the year of disposition, rather than computing depreciation for
partial periods to the nearest month
Intangible assets: those assets that are used in the operation of a business but
have no physical substance and are noncurrent
Natural resources: mines, oil fields, standing timber, and similar assets that are
physically consumed and converted into inventory
Net identifiable assets: total of all assets except goodwill minus liabilities
Present value: the amount that a knowledgeable investor would pay today for the
right to receive future cash flows
Replacement cost: the estimated cost of replacing an asset at the current balance
sheet date
Residual (salvage) value: the portion of an assets cost expected to be recovered
through the sale or trade-in of the asset at the end of its useful life
Revenue expenditure: any expenditure that will benefit only the current
accounting period

Straight-line depreciation: a method of depreciation that allocates the cost of an

asset equally to each year of its useful life
Sum-of-the years-digits depreciation: an accelerated method of depreciation
in which the depreciable cost is multiplied each year by a fraction of which the
numerator is the remaining years of useful life and the denominator is the sum of
the years of useful life
Units-of-output depreciation: a depreciation method in which cost is divided by
the estimated units of lifetime output; the unit depreciation cost is multiplied by the
actual units of output each year to compute the annual depreciation expense