Acct 041
Physical Controls
Safes, vaults, safety deposit boxes; locked warehouses and storage cabinets; cpu facilities w/ passwords , etc
Net Income/Loss =
Sales Revenue - COG Sold - Operating Expenses
Inventory turnover rate =
Sales/Inventory = (COG Sold/Avg Inventory)
Financial Accounting Standards Board
The primary accounting standard-setting body in the United States
Cost Principle
says that companies record assets at their cost
gross profit rate=
(Revenue - COG Sold)/Net Sales
Periodic Inventory System
* COG sold determined by count @ end of accounting period * determines inventory on hand * estimates inventories more frequently
Perpetual Inventory System
* Maintain detailed records of the cost of each inventory purchase and sale * Records continuously show inventory that should be on hand * Company determines cost of goods sold each time a sale occurs * Provides better control over inventories
Cash-Basis Accounitng
* Revenues recognized when cash is received * Expenses recognized when cash is paid * NOT in accordance with GAAP
Accrual-Basis Accounting
* Transactions recorded in periods in which events occur * Revenues are recognized when earned rather than when cash is received * Expenses are recognized when incurred rather than when paid
Reconciling Bank Account
* reconcile balance per books and balance per bank to their adjusted (corrected) cash balances * Reconcile deposits in transit, outstanding checks, bank memos, and errors (all these are known as time lags)
Accounting Cycle
1) Analyze business transactions 2) journalize transactions 3) post to ledger accounts 4) prepare a trial balance 5) Journalize & post adjusting entries 6) Prepare an adjusted trial balance 7) prepare financial statements 8) Journalize & post closing entries 9) prepare a post-closing trial balance
Average Cost (3 things)
1) COG available for sale on basis of weighted-avg unit cost incurred 2) assumes goods are similar in nature 3) applies weighted-avg unit to units on hand to determine cost of ending inventory
Components of Internal Control (4 things)
1) Control environment & activities 2) Risk assessment 3) Information & communication 4) monitoring
What does the journal do?
1) Discloses complete effects of a transaction 2) Provides a chronological record of transactions 3) Helps prevent/locate errors b/c the debit & credit amounts can be easily compared
Adjusting Entries (3 things)
1) Ensures that revenue/expense recognition principles are followed 2) Necessary b/c trial balance may not contain current & complete data 3) Required every time a company prepares financial statements
How to post?
1) Post to debit account—date, journal pg #, amount 2) Enter debit account # in journal reference column 3) Post to credit account—date, journal pg #, amount 4) Enter credit account # in journal reference column
Steps in Preparing a Worksheet
1) Prepare trial balance on worksheet 2) enter adjustment data and adjusted balances 3) extend adjusted balances to appropriate statement columns 4) total statement columns, compute net income/loss
Independent Internal Verification (5 things)
1) records periodically verified by an employee who is independent 2) discrepancies reported to mgmnt 3) supervisors count cash receipts daily 4) treasurer compares total receipts to bank deposits daily and checks to invoices 5) reconcile bank statements
Retained Earnings
All of the incomes that stay inside the company, reinvested in company; decreased by expenses and dividends
Steps in Recording Process
Analyze each transaction, enter transaction in journal, transfer journal info to ledger accounts
COG Sold =
Beginning Inventory + Purchases - Ending Inventory
HR Controls
Bond employees, rotate employees' duties and require vacations, and conduct background checks
Estimated Cost of Ending inventory =
COG available for sale - net sales + estimated gross profit
Over-the-Counter Receipts
Important internal control principle—segregation of record-keeping from physical custody
sales revenue
In preparing closing entries, income summary account will be credited for the balance of ______.
Internal Control 4 things
Methods and measures adopted to: 1) Safeguard assets 2) Enhance accuracy & reliability of accounting records 3) Increase efficiency of operations 4) Ensure compliance w/ laws & regulations
Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account balances after journalizing & posting of closing entries
Dividend
a distribution of the company's earnings to its stockholders
Journalizing
act of entering transaction data into the journal
Accruals
adjust accrued revenues & accrued expenses
Deferrals
adjust prepaid expenses & unearned revenues
Temporary Accounts
are closed, include all revenue accounts, all expense accounts, & dividends
Current Assets
assets that a company expects to convert to cash or use up within 1 year or the operating cycle (whichever is longer)
Time Period Assumption
assumes that the economic life of a business is divided into artificial time periods
Journal
book of original entry where transactions are recorded in chronological order.
Documentation Procedures
companies should use pre-numbered documents & all documents should be accounted for; Use remittance advice (mail receipts), cash register tapes, and deposit slips, prenumbered checks, approved invoices,
General Ledger
contains the entire group of accounts maintained by a company
Establishment of Responsibility
control is most effective when only one person is responsible for a given task; only designated personnel are authorized to handle cash receipts (cashiers), sign checks
Cost of Goods (COG)
cost of goods sold is the total cost of merchandise sold during the period
Book Value
difference between the cost of any depreciable asset and its accumulated depreciation
Trial Balance
each account is analyzed to determine whether it's complete and current
First-In, First-Out (FIFO)
earliest goods purchased are first to be sold, often parallels actual physical flow of merchandise, & generally good business practice sells oldest units first; COG Sold = COG for sale - ending inventory
Petty Cash Fund
established to pay relatively small expenditures
Gross Profit Method
estimates the cost of ending inventory by applying a gross profit rate to net sales
Balance Sheet
financial statement that summarizes the financial position of a company
Closing Entries
formally recognize in the general ledger the transfer of net income/loss and dividends to retained earnings
Compensating balances are a restriction on the use of a company's cash and should be disclosed where?
in the financial statements
Monetary Unit Assumption
include in the records only transaction data that can be expressed in terms of money; The assumption that the unit of measure remains sufficiently constant over time
Cost Constraint
info is costly; weighing the cost that companies will incur to provide info against the benefit gained from the info
Lower-of-Cost-or-Market
inventory is reported as this in the financial statements, market defined as current replacement cost
Long-Term Investments
investments in stocks & bonds of other companies or in long-term assets (land or buildings) that a company is not currently using in its operating activities
Last-In, First-out (LIFO)
latest goods purchased are first to be sold, seldom coincides with actual physical flow of merchandise, & includes good stored in piles (coal or hay)
Expense Recognition Principles
match expenses with revenues in the period when the company tries to generate those revenues
Permanent Accounts
non closed, include all asset accounts, all liability accounts, & stockholders' equity
Cash Discount
not granted to retail customers
Long-Term Liabilities
obligations a company expects to pay after one year—mortgage, car loan, bonds payable, etc
Current Liabilities
obligations a company must pay w/in the coming year or operating cycle (longer one)
Worksheet
optional, multiple-column form used in preparing financial statements
FOB Destination
ownership passes to buyer once good is delivered and seller pays shipping
FOB Shipping Point
ownership passes to buyer once good is placed on truck; buyer pays for shipping
Bank Reconcilliation
prepared to explain any difference between the depositor's balance per books and the balance per bank
Posting
process of transfering amounts from journal to ledger accounts
Revenue Recognition Principles
recognize revenue in acct period in which it is earned—service revenue is "earned" when service is performed
Segregation of Duties
related duties should be assigned to different individuals; different individuals receive cash, record cash receipts, hold the cash, approve/make payments,
Materiality Constraints
relates to a financial statement item's impact on a company's overall financial condition and operations (material when size influences a decision)
Economic Entity Assumption
requires activities of entity be kept separate and distinct from the activities of its owner & all other economic entities
Cash Equivalents
short-term, highly liquid investments that are both readily convertible to cash and so near their maturity that their market value is relatively insensitive to interest rate changes
Fair Value Principle
states that assets and liabilities should be reported at their true value
Goodwill
the extra amount paid to make an acquisition
Depreciation
• Depreciation allocates a portion of the asset's cost as an expense during each period of the asset's useful life • Depreciation does not attempt to report the actual change in the value of the asset • Depreciation Expense has a normal debit balance & its counterpart is Accumulated Depreciation, a contra-asset account
Adjusted Trial Balance
• Prepared after all adjusting entries are journalized and posted • Purpose is to prove the equality of debit balances & credit balances in the ledger • The primary basis for the preparation of financial statements