Administrative expenses Expenses incurred in the ad-
ministration or general operations of the business.Book inventory The amount of inventory recorded in the
accounting records.ConsigneeThe retailer carrying an item for sale (consign-
ment) that is owned by another retailer (consignor).ConsignmentMerchandise owned by a retailer (consignor)
that is being carried for sale by another retailer (consignee).ConsignorA retailer who allows another retailer (consignee)
to carry and sell its merchandise (consignment).Controlling account The account in the general ledger that
summarizes the balances of the accounts in a subsidiary
ledger.Cost of merchandise sold The cost that is reported as an
expense when merchandise is sold.Credit memorandum A form used by a seller to inform the
buyer of the amount the seller proposes to credit to the ac-
count receivable due from the buyer.Credit period The amount of time the buyer is allowed in
which to pay the seller.Credit terms Terms for payment on account by the buyer
to the seller.Debit memorandum A form used by a buyer to inform the
seller of the amount the buyer proposes to debit to the ac-
count payable due the seller.Direct method A method of preparing the statement of
cash flows that analyzes each transaction and its effect on
cash flows.FOB (free on board) destination Freight terms in which
the seller pays the transportation costs from the shipping
point to the final destination.FOB (free on board) shipping point Freight terms in
which the buyer pays the transportation costs from the ship-
ping point to the final destination.Gross profit Sales minus the cost of merchandise sold.Income from operations (operating income) The ex-
cess of gross profit over total operating expenses.Indirect method A method of preparing the statement of
cash flows that reconciles net income with net cash flows
from operating activities.Inventory shrinkage The amount by which the merchan-
dise for sale, as indicated by the balance of the merchandise
inventory account, is larger than the total amount of mer-
chandise counted during the physical inventory.InvoiceThe bill that the seller sends to the buyer.Merchandise available for sale The cost of merchandise
available for sale to customers.Merchandise inventory Merchandise on hand (not sold)
at the end of an accounting period.Multiple-step income statement A form of income state-
ment that contains several sections, subsections, and subtotals.Net sales Revenue received for merchandise sold to cus-
tomers less any sales returns and allowances and sales dis-
counts.Other expense Expenses that cannot be traced directly to
operations.Other income Revenue from sources other than the pri-
mary operating activity of a business.Periodic inventory method The inventory method in
which the inventory records do not show the amount avail-
able for sale or sold during the period.Perpetual inventory method The inventory method in
which each purchase and sale of merchandise is recorded in
an inventory account.Physical inventory A detailed listing of the merchandise
for sale at the end of an accounting period.Purchase return or allowance From the buyer’s perspec-
tive, returned merchandise or an adjustment for defective
merchandise.Purchases discounts Discounts taken by the buyer for
early payment of an invoice.Report form The form of balance sheet in which assets, lia-
bilities, and stockholders’ equity are reported in a downward
sequence.238 Chapter 5 Accounting for Merchandise Operations
earnings and total stockholders’ equity are also misstated.
Likewise, merchandise inventory, current assets, and total
assets are misstated. This misstatement of total assets, cur-
rent assets, and merchandise inventory equals the misstate-
ment of stockholders’ equity. The effects of inventory
misstatements on the financial statements are shown in
Exhibit 12.Describe and illustrate the use of gross profit and op-
erating income in analyzing a company’s operations.
Gross profit and operating income are two important prof-
itability measures analysts use in assessing the efficiency
and effectiveness of a merchandiser’s operations. Gross
profit and operating income are normally analyzed over
time as a percent of net sales.9
GLOSSARY