Accounting Exam 2

Front 1

The company should maintain security over assets and accounting records.

Back 1

physical controls (ex. of preventative control)

Front 2

Management should periodically determine whether the amounts of physical assets of the company match the accounting records.

Back 2

reconciliations (detective controls)

Front 3

The company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties.

Back 3

employee management (ex of preventative controls)

Front 4

The actual performance of individuals or processes should be checked against their expected performance.

Back 4

performance reviews (detective controls)

Front 5

Authorizing transactions, recording transactions, and maintaining control of the related assets should be separated among employees.

Back 5

separation of duties (preventative controls)

Front 6

To prevent improper use of the company’s resources, only certain employees are allowed to carry out certain business activities.

Back 6

proper authorization

Front 7

occupational fraud

Back 7

te use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organizational resources.

Front 8

three factors that contribute to fraudelent activity

Back 8

opportunity, financial pressure, rationalization

Front 9

internal controls

Back 9

put in place to:
-Safeguard companies assets
~robbery, employee theft, misuse of funds
-enhance the accuracy and reliability of accounting information
~fraudulent activities, errant financial reporting
-ensure compliance with regulations
-uses cash controls: bank reconciliation and petty cash fund

Front 10

internal controls

Back 10

preventative and detective controls

Front 11

limitations of internal controls

Back 11

Collusion: 2 or more employees working together

human element

Front 12

steps of internal control over cash receipts

Back 12

-record all cash receipts as soon as possible.
-open mail everyday and make a list of checks received
-designate an employee to deposit cash and checks into the company's bank account
-have another employee record cash receipts in the accounting records
-accept credit cards or debit cards to limit the amount of cast employees handle.

Front 13

internal controls over cash disbursements

Back 13

- make all disburesments, other than very small ones, by check, debit card or credit card.
-authorize all expenditures before purchase and verify the accuracy of the purchase itself.
-make sire checks are serially numbered and signed only by authorized employees
-periodically check amounts shown in the debit cards and credit card statements against purchase receipts
- set maximum purchase limits on debit cards and credit cards
-employees responsible for making cash disbursements should not also be in charge of cash receipts.

Front 14

bank reconciliation

Back 14

matches the balance of cash in the bank account with the balance of cash in the company's own records

Front 15

in bank reconciliation what is a timing difference

Back 15

differences in cash occur when the company records transactions either before or after the bank records the same transaction.

Front 16

in bank reconciliation what is an error

Back 16

they can be made either by the company or its bank and may be accidental or intentional.

Front 17

bank reconciliation step 1:

Back 17

-reconciling the bank's cash balance:
~deposits outstanding: are cash receipts of the company that have not been added to the bank's record of the company's balance.
~checks outstanding are the checks the company has written that have NOT yet been subtracted from the bank's record of the company's balance

Front 18

step 2:

Back 18

- reconciling the company's cash balance
~ex: interest earned by the company, collections made by the bank on the company's behalf, service fees and charges for NSF checks (bad checks)

~ account for all cash transactions recorded by the bank not recorded on the company's books.
~note any errores discovered.

Front 19

step 3:

Back 19

-Adjusting the company's cash balance
~each item used in determining the company's reconciled cash balance must be recorded on the company's books with a journal entry

Front 20

petty cash

Back 20

used to pay for these minor purchases, companies keep some minor amount of cash on hand in in the petty cash fund

Front 21

petty cash fund involves:

Back 21

-establishing the fund appoint custodian and determine size
-making payments from the fund
set policies and keep receipts
-replenishing the fund
restore to establish total

Front 22

cash is recorded in both the Balance sheet and the statement of cash flow. whats the difference?

Back 22

Balance sheet shows the amount of cashe available at a given point in time.

the statement of cash flows shows the Sources and Uses of cash during a period of time

Front 23

through what the investors know the cash inflows and outflows of Operating activities, Investing activites and Financing activities

Back 23

statement of cash flows (look at example on page 185)

Front 24

include cash transactions involving revenue and expense events during the period. It includes the cash effect of the same activities that are reported in the income statement

Back 24

operating activities

Front 25

activities include cash investments in long-term assets and investment securities

Back 25

investing

Front 26

activities include transactions designed to raise cash or finance the business. there are two ways to do this: borrow cash from lenders or raise cash from stock holders

Back 26

financing

Front 27

NET income---> income statement: revenue-expenses

Back 27

vs. Free cash flows---->statement of cash flows: operating cash flow+investing cash flow

Front 28

credit cards

Back 28

even though the seller does not receice cash at the time of the credit sale, the firm records revenue immediately, as long as future collection from the customer is reasonably certain.

Front 29

accounts receivable

Back 29

the legal right to receive cash is valuable and represents an asset of the company. and the firm records it at the time of a credit sale.

Front 30

types of receivables

Back 30

receivables: amounts due from individuals and other companies that are expected to be collected in cash.

Accounts receivable: amounts owed by customers that result from the sale of goods and services.

Notes receivable: claims for which formal instruments of credit are issued as proof of debt

Nontrade: from a source other than the customer. ex. interest, loans to officers, advances to employees and income taxes refundable.

Front 31

trade discount

Back 31

reduction in the listed price of a product or service.
when recording a transaction, companies don't recognize trade discounts Directly.
they record it as the discount price

Front 32

Sale discount

Back 32

represents a reduction, not in the selling price of a product or service but in the amount to be paid by a credit customer if payment is made within a period of time.

Front 33

2/10

Back 33

get a 2% discount if paid in 10 days.
record as: Debit cash for 392, debit sales discount for 8, credit accounts receivable for 400

Front 34

sales return

Back 34

-we reduce the customer's account balance if the sale was on account or
-we issue a cash refund if the sale was for cash

Front 35

sales allowance

Back 35

price match with a competitor. some one is doing it for $50 cheaper
record: sales allowance debit $50, accounts receivable $50 credit

Front 36

we account for uncollectible accounts (bad debt) using what's called the

Back 36

allowance method

Front 37

percentage of receivables method (how much people aren't going to pay you back)

Back 37

record: debit bad debt expense for the amount and credit allowance for uncollectible accounts.
we record this in the assets section, not directly with accounts rec.

once you have a REAL customer who cannot pay (not just an estimate) this is how it is recorded:debit allowance for uncollectible accounts, credit accounts receivable.

this write off leaves basically no change to total assets because they already estimated for this.

Front 38

age method

Back 38

the older the account the less likely it is to be collected

Front 39

notes receivable

Back 39

- classified as either current or long-term depending on the expected collection date
-if the time to maturity is longer than one year the note receiveble is a long-term asset.

Front 40

interest

Back 40

face value X annual interest rate X fraction of the year.

record:
debit cash for 10,600
credit notes receivable for 10,000
credit interest for 600

Front 41

turnover ratio

Back 41

= net credit sales/ average accounts receivable

Front 42

average collection period

Back 42

= 365 days/ receivables turnover ratio (want this number to be low and turnover to be high)

Front 43

service company

merchandising

Back 43

sell a service not a good. typically do not have inventory

typically purchase inventory in finished form and sell it to customers. their primary source of revenue is sales revenue.

Front 44

report inventory as current asset.

Back 44

item sold during the year become cost of goods sold.

Front 45

merchandising income measurements

Back 45

sales revenue - cost of goods sold= gross profit -operating expenses = net income

Front 46

merchandising companies

Back 46

middle man between the actual manufacturer and the end user

Front 47

manufacturing inventory

Back 47

raw materials: the cost of a components that will be used in production, but have not been placed in production

work in progress: goods that have been placed into production but are not yet complete at the end of the period

finished work- the cost of manufactured items that are complete and ready for sale

Front 48

cost of inventory (cost of goods) available for sale=

Back 48

costs of beginning inventory + the additional purchases during the year

Front 49

ending inventory=

cost of goods sold=

Back 49

assets not sold!

inventory sold

Front 50

inventory cost methods

Back 50

-specific identification
-FIFO (most closely resembles physical flow of items)
-LIFO (save you $ on taxes)
-weighted- average cost

Front 51

specific id

Back 51

things like cars, fine art or jewelry. keep track of each item and know when each one is sold.

Front 52

perpetual inventor

Back 52

it maintains a continual (perpetual) tracking of inventory.

a continual tracking helps a company to better manage its inventory levels.

Front 53

periodic inventory

Back 53

it does not continually modify inventory amounts, but instead periodically adjusts for sales of incentory at the end of the reporting period based on physical count of inventory on hand

Front 54

single step income statement

multiple-step income statement

Back 54

total revenues minus total expenses

distinguishes activities. separates different revenues and expenses from others.

Front 55

multistep

Back 55

Net sales revenue (sales revenue minus discounts and returns)
MINUS
cost of goods sold
EQUALS
gross profit
MINUS
operating expenses
EQUALS
income from operations
PLUS OR MINUS
nonoperating revenues and expenses
EQUALS
income before income taxes
MINUS
income tax expense
EQUALS
net income

Front 56

lower of cost or market (LCM) method

Back 56

when the value of inventory falls below its cost, companies are required to report inventory at the lower market value. and this is considered the REPLACEMENT cost.

must be used in conjunction with either FIFO or LIFO or other methods

at LCM, market price is defined as current replacement cost not selling price.

also record the difference in the original price to the new market pirce (if lower) as:

debit cost of goods sold for $, credit inventory for $

Front 57

another important indicator of the company's successful management of inventory is the Gross Profit Ratio

Back 57

gross profit/net sales

-the higher the gross profit ratio the higher the markup a company is able to achieve on its inventory.