Financial Accounting (Chp. 4)

Front 1

In what ways does a firm controls cash?

Back 1

•Putting it in a locked safe (control for cash)
•The company keeps accurate records, especially if sales are made on credit (control for cash)
•Cash registers (safeguard cash)

Front 2

What are the internal controls of controlling cash?

Back 2

• Segregation of duties (control for cash)
• Bank reconciliations (controlling cash, 1 of the most important controls)

Front 3

What is the purpose of a bank reconciliation?

Back 3

The purpose of a bank reconciliation is to provide a control to protect cash. The amount of cash reported on the bank statement (an independently calculated balance) must be reconciled (made equal) to the cash reported in the accounting records.

Front 4

How often would a firm prepare a bank reconciliation?

Back 4

A firm would prepare a bank reconciliation as often as the bank provided a statement, usually once each month.

Front 5

Performing a bank reconciliation enables a firm to do what?

Back 5

1. Locate any errors, whether made by the bank or by the firm.
2. Make adjustments to the cash account in the firm’s books for transactions the bank has recorded, but the firm has not yet recorded in its cash account.

Front 6

The balance per bank side of the reconciliation

Back 6

The Cash Balance from the bank statement:
1. Subtract outstanding checks
2. Add deposits in transit
3. Errors made by the bank may require additions or reductions

Front 7

The balance per books (accounting records) side of the reconciliation

Back 7

The Cash Balance from the bank statement:
1. Add collections made by the bank
2. Subtract service charges (especially like an overdraft fee)
3. Subtract NSF checks (non-sufficient funds aka “bounced checks”)
4. Add interest earned
5. Errors made by the firm may require additions or reductions

Front 8

Describe how cash is reported on the financial statements

Back 8

• On a balance sheet, cash and cash equivalents are reported as the first [current] asset.
• Cash is reported in its very own statement – the statement of cash flows. It reports the change in cash from 1 balance sheet to the next.

Front 9

Calculate bad debts expense & explain how a firm evaluates and reports accounts receivable

Back 9

• A firm extends credit to its customer which results in a current asset called accounts receivable. On the balance sheet, accounts receivable is a current asset & should reflect the net amount the firm expects to collect (known as net realizable value).
• If the firm has a significant amount of bad debts (i.e. customers who will not pay), then the firm must estimate the amount of bad debts & deduct it from gross accounts receivable to get the net realizable value of accounts receivable to report on the balance sheet. This is called the allowance method of accounting for bad debts. This means that bad debts expense will be recognized as an estimate so that the firm can match the bad debts expense with the related sales.
• When a specific customer is identified as one who will not pay, the account is written off but no expense is recognized at that time. (The expense was already recognized in the period of the sale.)

Front 10

Explain the difference between sales on credit & credit card sales

Back 10

• Sales on credit (extending credit), which is recorded as an account receivable, comes with its risks. The firm always faces the risk of a certain amount of people not paying what they owe. So with sales on credit, it is the responsibility of the firm to keep track of people making their payments.
• Credit card sales are almost like cash to a business. The credit card company reimburses the firm & the credit card company is paid a fee for the service (used by the firm). The risk is much LESS than that of extending the firm’s own credit to its customers.

Front 11

Can you explain more about notes receivable?

Back 11

Notes receivable are amounts owed to the firm, often by customers who have been slow in paying their accounts and have negotiated new payment terms that include interest.

Front 12

Analyze a firm’s accounts receivable with ration analysis

Back 12

Firms use accounts receivable to help evaluate a firm’s liquidity. The accounts receivable turnover ratio (net sales or net credit sales divided by average accounts receivable) measures how quickly the firm is collecting its accounts receivable

Front 13

Identify the risks and controls associated with cash and receivables

Back 13

Controls are especially important with respect to cash. Three of them are (1) clear assignment of responsibility, (2) specific procedures for documentation, and (3) independent internal verification of the data.

Front 14

Interest equals what?

Back 14

Interest = Principal × Rate × Time

Front 15

Segregation of duties (define)

Back 15

the person who has physical custody of an asset is not the same person who has record-keeping responsibilities for that asset.

Front 16

Bank statement (define)

Back 16

a summary of the activity in a bank account – deposits, checks, debit card transactions – usually sent monthly to the account owner.

Front 17

Bank reconciliation [aka cash reconciliation] (define)

Back 17

a comparison between the cash balance in the firm’s accounting records and the cash balance on the bank statement to identify the reasons for any differences for that month. It is simply a worksheet – it is not a formal part of the firm’s accounting system.

Front 18

Deposit in transit (define)

Back 18

a bank deposit the firm has made but is not included on the month’s bank statement because the deposit did not reach the bank’s record-keeping department in time to be included on the current bank statement.

Front 19

Outstanding check (define)

Back 19

a check the firm has written, but that has not yet cleared the bank (so it hasn’t been cashed yet). That is, the check has not been presented to the bank for payment yet.

Front 20

Cash equivalents (define)

Back 20

highly liquid investments with a maturity of 3 months or less that a firm can easily convert into a known amount of cash.

Front 21

Accounts receivable (define)

Back 21

a CURRENT asset that arises from sales on credit; it is also the total amount customers owe the firm.

Front 22

Net realizable value (define)

Back 22

the amount of its account receivable balance that the firm EXPECTS to collect.

Front 23

The allowance method (define)

Back 23

a method of accounting for BAD DEBTS in which the amount of the uncollectible accounts is estimated at the end of each accounting period.

Front 24

Bad debts expense (define)

Back 24

the expense to record uncollectible accounts receivable.

Front 25

The allowance method for uncollectible accounts (define)

Back 25

a contra-asset account, the balance of which represents the total amount the firm believes it will not collect from its total accounts receivable.

Front 26

Aging schedule (define)

Back 26

an analysis of the amounts owed to a firm by the length of time they have been outstanding.

Front 27

Direct write-off method (define)

Back 27

a method of accounting for bad debts in which they are recorded as an expense in the period in which they are identified as uncollectible.

Front 28

Promissory note (define)

Back 28

a written promise to pay a specified amount of money at a specified time.

Front 29

The maker of a note (define)

Back 29

the person or firm making the promise to pay.

Front 30

The payee of a note (define)

Back 30

the person or firm receiving the money.

Front 31

Accounts receivable (AR) turnover ratio [define]

Back 31

a ratio that measures how quickly a firm collects its accounts receivable. It is defined as credit sales divided by average accounts receivable.

Front 32

What is the actual equation for the Accounts receivable turnover ratio?

Back 32

Net sales/Avg. net AR

Average net accounts receivable = (Ending net AR balance from the prior year + current net AR balance)/2

How many days you collect receivables = 365 ÷ Accounts receivable turnover ratio

Front 33

Inventory (fast facts)

Back 33

Inventory is initially recorded as a CURRENT asset.

When inventory is sold, it is recorded as an expense.

Front 34

What does "FOB" stand for?

Back 34

FOB = free on board. The SELLERS pay for the freight cost (selling expense aka delivery expense)