Accounting 1 Exam 3
Use the balance sheet and income statement to evaluate a firm's performance
1. Analysis 2. Interpretation 3. Evaluation
Limitations of Financial Analysis
1. Assumes one can predict the future using past data 2. Uses historical cost information (neglects inflation) 3. Uses year-end data that may not be representative of the company's usual financial status 4. Allows companies that are in the same industry to be compared event when they are not really comparable 5. falis to recognize that a substantial amount of important information is not included in a company 's financial statements
How to reinstate an account
Acc Rec - whoever account (Debit) Allowance for Doubt Acc (Credit) Cash (Debit) Acc Rec (Credit)
W company sells products costing 3000 for a sales price of 5000 on account to Jill. Jill is given sales terms of 2/10, n/30
Acc Rec. 5000 Sales. 5000 CGS. 3000 Inventory 3000
Net Accounts receivable
Accounts receivable on balance sheet
How to write an account off?
Allowance for Doubtful Account (Debit) Acc Rec - whoever account (Credit)
The journal entry under the "Allowance" method includes
Bad debt Expense (Debit) Allowance for Doubtful Accounts (Credit)
Jill pays 6 days after she purchased the products
Cash 4,900 Sales Discount 100 Acc Rec. 5000
Quick assets include
Cash and account receivables
Does Allowance for Doubtful Accounts have a debit or credit balance?
Credit
Does bad debt Expense have a debit or credit balance?
Debit
Trend Index
Dollar amount in year studying/dollar amount in earliest period reported times 100
_______ ______ __ _____ on hand (because cash sitting in the checking account is unproductive because it is not earning any interest or dividends
Don't keep to much
Inventory Turnover, Average Collection Period measure
Inventory (Efficiency)
W company sells products costing 6,000 for a sales price of 10,000 on account to Jack
Journal Entry Acc Rec 10,000 Sales. 10,000 CGS 6000 Inventory. 6,000
_________ ____________ on hand to be able to meet day-to-day business needs as well as pay off any debt obligations
Keep enough
Debt Ratio measure
Leverage
Current Ratio and Quick Ratio measures
Liquidity
Accounts Receivable minus allowance for Doubtful Accounts equals
Net Accounts receivable
Categories of Internal Control
Physical Controls Authorization Independent Checks Documentation Separation of Duties
Gross Proft Margin, Net Profit Margin, ROA, ROE measure
Profitability
Jack Returns $1,000 of merchandise (that cost $600)
Sales Return 1,000 Acc. Rec. 1,000 Inven. 600 CGS. 600
Balance Sheet approach
a. Multiply Receivables by a historical percentage of uncollectibles - this is the desire balance in the Allowance account (want) b. Compare the figure from part "a" with the current balance in the allowance account (have) c. The amount for the journal entry is whatever it takes to get the current balance in the Allowance account to be the Desired balance in the Allowance account (need)
Income Statement Approach
a. Multiply sales by a historical percentage of uncollectibles b. This is the amount for the journal entry
Cash includes each of the following except: a. a postdated check. b. currency. c. money orders. d. funds in a checking account.
a. a postdated check
Which of the following is not one of the five components: a. segregation of duties b. risk assessment c. monitoring activities d. control activities
a. segregation of duties
Trend Analysis
also known as Horizontal Analysis
Common size analysis
also known as vertical analysis
Which of the following is true? a.Internal auditors are independent of the company they audit. b. Internal audits provide appraisals of a company's internal control. c. The company being audited cannot pay the external auditing firm since this would violate their independence. d. Outside parties prefer appraisals by internal auditors over those of external auditors since they know more about the company being audited.
b. Internal audits provide appraisals of a company's internal control.
Electronic funds transfer (EFT) involves transferring cash from one location to another using: a. armored trucks. b. computers. c. bicycle messengers. d. the mail service.
b. computers
Good internal control over cash received on account involves the mailroom doing each of the following activities except: a. Open the mail. b. Prepare the deposit receipt. c. Prepare the remittance list. d. Send checks to the treasurer.
b. prepare the deposit receipt
Vertical analysis
balance sheet items are presented das a percentage of total assets for that year; income statement items are presented as. percentage of total sales for that year
Internal controls do each of the following except: a. protect assets from theft. b. evaluate the performance of employees. c. guarantee the accuracy of the accounting records. d. increase the likelihood that any errors will be caught.
c. guarantee the accuracy of the accounting records.
Current assets include
cash, accounts receivables, and inventory
Cash in bank accounts such as
checking accounts
Each of the following is part of the fraud triangle except: pressure opportunity concealment rationalization
concealment
The allowance account is a _____ ______ _______
contra - asset account
Cash on hand consists of
currency, money orders, coins, and checks waiting to be deposited
Effective cash management involves all the following except: a. Manage accounts receivable. b. Manage inventory. c. Invest excess cash. d. Conduct internal audits.
d. Conduct internal audits.
Having one person responsible for the related activities of ordering merchandise, receiving the merchandise, and paying for the merchandise: a. provides increased security over the firm's assets. b. is an example of good internal control. c. is a good example of segregation of duties. d. increases the potential of fraud.
d. increases the potential of fraud
Restricted cash: a. must be shown as a current asset. b. must be shown as a noncurrent asset. c. is shown as a liability. d. is reported separate from unrestricted cash.
d. is reported separate from unrestricted cash.
Horizontal Analysis
financial statement items are presented as a percentage of their value in the base year
Unintentional mistakes and intentional mistakes in accounting are known as
fraud
Cash equivalents
highly liquid, interest bearing investments that have maturities of three months or less when purchased
Analysis
includes examination and testing
Evaluation
is making judgements and decisions about possible courses of actions based on analysis and interpretation
Internal control
is to help protect assets and increase reliability of accounting records. Recall that CPA auditors are now required to audit the effectiveness of a business' internal control system
Current assets are listed in order of
liquidity
Types of Ratios
liquidity, activity, leverage, profitability, market value
Bank lenders and creditors focus much on _________ and _________ ratios
liquidity, leverage
Interpretation
means understanding what you see
Quick ratio
measures liquidity
Stockholders and potential investors focus much on __________ and ___________ ratios.
profitability, market value
Bad debt expense must be ____________ in the _____ ________ as the related __________ were recognized.
recognized, same period, sales
Cash equivalents include
savings account, certificates of deposits, money market funds, and treasury bills and commercial paper