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127 Cards in this Set
- Front
- Back
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What are the two reasons a company will adopt internal control methods?
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safeguard its assets and ensure accuracy and reliabilty vof accounting records
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What are the six principles of internal control?
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establishment of responsibility
segregation of duties independent internal verification documentation procedures physical, mechanical, and electronic controls other controls |
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what are the three way to segregate the duties?
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authrization
record keeping and custody of assets |
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What is an example of segregation of duties?
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each employee should have a job description
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What is an example of authorization?
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dont give too many responsibilities to one person
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What is an example of record keeping?
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journal entries
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What is an example of independent internal verification?
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internal auditers
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List three controls that could be considered "other controls"?
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background checks
forced vacations for employess bonding the employees (getting insurance on the employees) |
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What are the two limitations of internal controls?
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resonable assurance and collusion
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What is collusion?
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when two or more employees work together to commit fraud
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What is SOX?
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the sarbanes oxley Act
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In what year was the Sarbanes-Oxley ACt passed by congress?
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2002
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What was the Sarbanes-Oxley Act in response to?
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the corporate scandals in the early 2000s
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What were the three major provisions of the Sarbanes- Oxley Act?
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Created the Public Company Accoutning Oversight Board (PCAOB)
more responsibility on management to maintain effective controls externam auditer must audit a public companys internal controls along with the financial statements |
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What is the PCAOB?
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Public company accounting oversight board
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If there is fraud whithin a company, who is most to blame?
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the manager
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Who must audit the compnaays financial statements and controls?
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an external auditor
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When putting cash on the balance sheet, what is it writeen as?
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cash and cash equivalnets
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What are the two main compopnents of cash?
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checking/savings account, money order, petty cash
2.) short term highly liquid investments w/ a maturity of 3 months or less (CDs, money market funds, U.S> tresurary bills) |
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What is restricted cash?
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cash set aside for specific purpose
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How is restricted cash listed on the balance sheet?
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sepratly from cash and cash equivalents
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MOney set aside for what is genearally lited as a LT asset?
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money for cars, builidings or land
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What is the compensation balance?
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restriction on the use of cash; it is disclosed in the note to the financial statement
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How is compensating balances known by others? How is it disclosed?
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It will say on the blance sheet something along the lines of "keep 1,000 in savings account"
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When performing a banck reconciliations,What are the two things listed at the top of the statement?
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banck blance and book balnace
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What are the three thigns that would follow under the bank reconciliation?
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deposits in transit
outstanding checks and errors by the bank |
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What are the ten things that go on the book side of the bank reconcilitaion?
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banck collections, EFT deposits, interest revenue, service charges, NSF checks, EFT payments and errors by the compnay, N/R and interest revenue from the note receivable
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In bank reconciliation which side are journal entries made for?
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the book side only
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If the starting amount says omething along the line of "from the general ledger", which side of the ban k reconciliation does it go on?
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the book side
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What are the two formats of the income statement?
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single step or multiple step
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What does the single step income statement entail?
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revenues minus expenses
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Who uses the multiple step income statement?
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merchandising firms
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What are the five steps to recoriding a multiple step income statement?
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1.) write the heading
2.) Net sales revenue - COGS = gross profit 3.) gross profit - operating expenses = income from operations 4.) add or subtract other revenues and expenses 5.) this all comes out to be net income or loss |
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Net sales revenue - COGS = ?
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gross profit
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Gross Profit - Operating expenses = ?
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Income from operations
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Income from operations +/- other revenues and expenses = ?
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net income or loss
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What is a currernt asset that goes on the balance sheet?
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inventory (the compnays cost of purchsing inventory)
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What are the two method sof maintaing inventory records?
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the perpetual method and the periodic method
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Which method for maintianing inventory controls will be used for the most part in this class?
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perpetual method
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What is the perpetual method?
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inventory account is kept up-to-date with purchases and sales. a physical inventory count at year-end reconciles the books to what is actually in the warehouse.
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Which method is being described with this formula?
Purchases - sold inventory = Balance |
perpetual method
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Which method is being described with this formula?
Purchases - whats left = sales |
peridodic method
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In the case of a FOB shipping point who pays for the shipping cost of the good?
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the buyer
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In the case of FOB destination, who pays the shipping cost of the good?
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the seller
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When on the subject of credit terms, what does 2/10 mean?
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2% of intrest is charged/subtracted in ten days
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When on the subject of credit terms, what does n/30 mean?
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the net amount is due in thiry days
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When the credit terms of purchase are 2/10, n/30? what is going on in this situation and what is it known as?
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the company s offering a 2% break to the payer if they pay the full amount whitin ten days . . . if they dont they have to pay the full amount by 30 days; this is known as a purchase discount
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what dies EOM mean?
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end of the month
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When the seller offers a purchase discount, how does the discount appear in a journal entry from the buyers perspective?
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A/P - 800 (debit)(full amount)
Inventory - (16)(the purchase discount) Cash - 784 (what the customer actually pays) |
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If a company sells 1300 of inventory on account and the nerchandise had an original cost of 600 what entrys need to be made?
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A/R 1300
sales revenue 1300 COGS 600 Inventory 600 |
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Sales returns and allowances is what type of account?
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a contra revenue
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if the customer returns 200 worth of merchandise and the returned merchandise has a cost of 100 what are the journal entrys that need to be made?
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sales returns and allowances 200
A/R 200 inventory 100 COGS 100 |
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What financial statement does Sales returns and allowances go on?
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the income statement
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when one is selling inventory, and the customer pays the balance due on the merchandise early so that they receive a discount, what does the journal entry look like?
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cash 1089
Sales Discount 11 A/R 1100 |
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Sales discount is what type of account?
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a contra-revenue
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What financial statement does the sales discount go on?
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the income statement
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what is the formula for gross profit %?
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gross profit/ net sales
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Who pays the shipping costs for frieght-out merchandise?
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seller
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What is the journal entry for a frieght-out for the seller?
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freight-out XX
Cash XX |
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What is the COGS model?
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beg inventory
+ purchases of inventory = costs of goods availaiable for sale (GAFS) -ending inventory =cost of goods sold (COGS) |
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List in order the things on the multiple step IS?
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Net sales
- COGS =Gross Profit -Operating expenses = income from operations +/- Expenses and Revenues =net income |
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Inventory is a current asset that appears on which financial statement?
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the balance sheet
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When is an inventory count taken?
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during slow periods or at the end of the acting year
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Which three goods are included in the inventory count?
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goods on hand, goods in transit, and cosigned goods
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What are considred goods on hand?
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goods in the store or on the premises
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What are the two diffrenet types of goods in transit?
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FOB shipping point
and FOB destination |
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Who pays the shipping for FOB shipping point?
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the buyer pays the shipping
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Who includes FOB shipping point goods in their inventory?
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the buyer
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Who pays the shipping for FOB destination goods?
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the seller
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Who includes FOB destination goods in their inventory?
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the seller
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What are cosigned goods?
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goods that are sold for other people at a fee; a company takes your inventory and sells it for you for a fee
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Who is the cosignee?
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the agent
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Who is the cosigner?
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the owner (includes goods in inventory)
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When selling inventory, what are the two journal entries that must be made?
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A/R XX
Sales revenue XX COGS XX Inventory XX |
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When selling inventory, the journal entry involving A/R and Sales revenue is the good at what price?
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the selling price
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When selling inventory, the journal entry involving COGS and inventory is the good at what price?
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the cost of the good
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How do companies with small amount of unique goods keep track of how much a specific inventory item cost and when it was sold?
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specifically identified
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How do companies with large quantities of similar goods, how does the company keep track of how much a specific inventory item costs and when it was sold?
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they make one of the three assumptions:
FIFO LIFO Average |
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What does FIFO stand for?
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first in first out
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What does LIFO stand for?
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last in first out
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What is the equation for average cost of a good?
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GAFS price / GAFS units
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What are the two advantages of FIFO?
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- reports the highest costs in ending inventory on the BS (better matching on the BS)
- reports higher net income |
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What are the two disadvantages of FIFO?
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- some profit on the IS is paper profit
- results in higher taxes |
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What are the advantages of LIFO?
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- results in lower taxes
- avoids paper profits on the IS |
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What are the disadvantages of LIFO?
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- reports lower income
- reports old costs (lowest) in ending inventory on the BS (which is bad matching) |
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What is the consistancy principle?
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a compnay will use the same accounting principles and methods from year to year
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If an error is made while reporting inventory, assuming that no other mistakes are made, how long will this mistake effect the books?
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two years
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What is the ratio for inventory turnover?
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COGS / avg. Inventory
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What is the ratio for days in inventory?
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365 / Inventory Turnover
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If the seller charges the buyer finance charges what does the journal entry look like?
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A/R XX
Intrest revenue XX |
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What is the allowance method used for?
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it is used to account for bad debts
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what are the three basic steps involved in the allowance method?
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1.) an estimate of bad debt expense is made at the end of the period
2.) an adjusting entry is made to recognize bad debt expanse and reduce the net balance in A/R 3.) a write-off journal entry is recorded when a bad debt actually occurs |
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Steps 1 and 2 of the allowance method are done when?
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at the end of a period before the financial statments are prepared
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What does the adjusting entry for the allowance method look like?
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Bad Debt Expense XX
Allowance for Doubtful Accounts XX |
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What kind of account is the allowance for doubtful accounts?
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a contra-asset
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Which Financial statement does the allowance for doubtful accounts accounts go on?
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it goes on the Balance sheet
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What is the allowance for doubtful accounts subtracted from?
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A/R
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When the allowance for doubtful accounts is subtracted from A/R waht it is known as?
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net A/R
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what does a write-off entry look like?
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Allowance for DA XX
A/R XX |
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If a customers account was written off but they later pay the amount that they owe, what do the journal entries look like?
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A/R XX
Allowance for DA XX Cash XX A/R XX |
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What are the two diffrent methods of estimating bad debt expenses?
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the percentage of sales method or the percentage of receivables method
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When estimating the bad debt expense, if the percentage of receivables method is used what must one remeber to consider?
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the prior balance in allowance for doubtful accounts
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What is the normal balance for the Allowance foe DA account?
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credit
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In trying to find the percentage of bad expense, if a percentage of net sales is found how is that recorded in the allowance for DA t?
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it is added to the existing balance
exiting balance + percentage of net sales = amount that goes on BS |
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In trying to find the percentage of bad expense, if a percentage of A/R is found how is that recorded in the allowance for DA t?
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Percentage found - exisitng balance = amount that is included in the adjusting entry
the opercentage calculated goes on the Balance sheet, not the amount included within the adjusting entry |
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what are the three diffrences between an A/R and a N/R?
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it is longer term,
there is an intrest componant and it a formal written agreement |
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In the case of a N/R, who is the maker?
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the party making the promise to pay
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In the case of N/R, who is the payee?
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the party to whom payment is due
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A 3-month note date march 1 is due what day?
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june 1st
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a 90-day note dated June 16th is due on what day?
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Sept 14th
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What is the equation for interest?
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prinicipal * rate * time
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In the interest equation, What is time considered?
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time is considred a year . . . so if there is a 3-month maturity than for the time portion it will be 3/12
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If the note is stated in day what number is used?
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360/12
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What must pass before interest can occur?
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time
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what is the journal entry for interest collection?
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Cash XX
N/R XX Interest revenue XX |
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If the companies year ends before the full maturity of a note what does the company do and what does the journal entry look like?
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Figure out the amount of intrest due at that date;
Intrest receivable XX Intrest Revenue XX |
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If the note falls between two fiscal years and the company already did an adjusting entry for the note at the end of the first year, what does the journal entry look like for the N/R at its maturity date?
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cash XX (sum of N/R, Intrest revenue, and Intrest receivable)
Intrest receivable XX (from Yr. 1) N/R XX Intrest revenue XX (from Yr. 2) |
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what are the three reasons for the creation of a N/R?
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lend money
sell goods or services transferring A/R to N/R |
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what is the general journal entry when goods or services are sold on a N/R?
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N/R XX
Sales revenue XX |
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What does it mean if a note is dishonered?
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the note is not paid in full at maturity
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If a note is dishonored what is must be done and what does the journal entry look like?
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remove the N/R and recognize interest revenue and then move them both to A/R
A/R XX N/R XX Interest revenue XX |
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what is the ratio for A/R turnover?
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net credit sales/ avg. net A/R
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what is the avg collection period?
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365 / A/R turnover
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For the allowance method involving the % of net sales the prior balance in the allowance acct be treated?
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ignored
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What is the standard adjusting entry for the allowance method?
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allowance for DA XX
A/R XX |
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what is the standard write-off entry?
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allowance for DA XX
A/R XX |
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what is the standard recovery entries for the allowance method?
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A/R XX
Allowance for DA XX Cash XX A/R XX |
