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8 Cards in this Set

  • Front
  • Back

What are the responsibilities of management as described in section 404 of the SOX act? What are the responsibilities of the company's auditor?

The responsibility of management is to document and assess the internal controls, while auditors must express an opinion on management's assessment.

Define a compensating balance. How are compensating balances reported on the balance sheet?

Compensating balances are the balances of a low interest or noninterest bearing account that the borrower holds with the creditor, which is usually a small percentage(2-5%) of the loan amount. They are also cash restrictions in relation to loans and loan commitments. They also result in a higher effective interest rate on the debt.

How compensating balances are reported depend on the nature of the restriction and the classification of the related debt; if the cash restriction is legally binding, then the cash is classified as current or noncurrent depending on the classification of the related debt. If the restriction is informal with no contractual agreement restricting the cash, then the the compensating balance can reported as part of cash and cash equivalents with a note disclosure of the arrangement.

Do U.S. GAAP and IFRS differ in how bank overdrafts are treated?

Yes, U.S. GAAP requires that bank overdrafts be treated as liabilities, while IFRS requires that bank overdrafts be offset against other cash accounts...

Explain the difference between a trade discount and a cash discount.

Trade discounts represent a reduction in the selling price of a good or service, while a cash discount(sales discount) reduces the amount to be paid by a credit customer if paid within a specified period of time.

Distinguish between the gross method and the net method of accounting for cash discounts.

Gross method views a discount not taken by a customer as part of sales revenue, while the net method considers sale revenue to be the net amount after discount, and any discounts not taken by the customer as interest revenue.

Accounting treatment for sales returns

Sellers typically account for returns as they occur, and make an adjusting entry for any remaining returns they expect to occur in the future.

A contrarevenue account, sales returns, is debited and the account that is credited depends on whether cash has already been collected or if there is an outstanding receivable.

Explain the typical way companies account for uncollectible accounts receivable(bad debts). When is it permissible to record bad debt expense only at the time when receivables actually prove uncollectible?

Companies typically account for bad debts with the allowance method by making an estimate of the amount of receivables that will be uncollectible.

It's permissible to record bad debt expenses only at the time when receivables actually prove uncollectible when the uncollectible amount cannot be estimated and when it's immaterial. It's also required for income tax purposes.

If a company has receivable from ordinary customers and related parties, can they combine those receivables in their financial statements under GAAP and IFRS?

Under GAAP, they must separate accounts from customers, and from related parties, while IFRS does not require that.