ACCT Test 3
5 STEP MODEL FOR REVENUE RECOGNITION
-Identify the contract(s) with the customer -Identify the performance obligations in the contract -Determine the transaction price -Allocate the transaction prices to the performance obligations in the contract -Record revenue or sales when, or as, the entity satisfies the performance obligation
A Company's Control Environment includes the following
1) Philosophy and operating style of management 2) Personnel policies and practices of the business 3) Overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control (i.e., tone at the top)
3 areas internal controls strives to meet
1. effectiveness and efficiency of operations 2. reliability of financial reporting 3. compliance with applicable laws and regulations
# of Days in Inventory
365 / Accounts Receivable Turnover Measures the average # of days A/R are on the books
SEGREGATION OF DUTIES
Accounting and administrative duties should be performed by different individuals—no one person prepares all the documents and records for an activity
Each shipment to customers from inventory is recorded on a specially printed form bearing a sequential number; these forms are the basis for entries into the computer system, which makes entries to inventory records and produces periodic reports of sales and shipments.
Adequate documents and records
Invoices received from outside suppliers are filed with purchase orders.
Adequate documents and records
Adjusted Bank Balance
Bank Balance + Deposits in Transit - Outstanding Checks=
SAFEGUARDS OVER ASSETS AND RECORDS
Both assets and records must be secured against theft and destruction
At regular intervals, internal audit reviews a sample of expenditure transactions to determine that payment has been made to a bona fide supplier and that the related goods or services were received and appropriately used.
Checks on recorded amounts
Cash registers display the price of each item purchased to the customer as it is recorded and produce a customer receipt that describes each item and gives its price.
Checks on recorded amounts
Internal Control Activities:
Clearly Defined Authority and Responsibility Segregation of Duties Adequate Documents and Records Safeguards over Assets and Records Checks on Recorded Amounts
Only the cashier assigned to the cash register is allowed to perform transactions.
Clearly defined authority and responsibility
Adjusted Company Balance
Company Balance + Bank Additions - Bank Deductions =
A balance sheet approach to estimating bad debt expense is not permitted under GAAP (generally accepted accounting principles).
False
As a result of the bank reconciliation process, a company will prepare an adjusting entry for a debit memo but not for a credit memo.
False
If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for bad debts
False
If a company hires honest employees and its top management acts with integrity, no internal control procedures will be necessary.
False
If the bank debits its customer's checking account, then the customer's cash balance increases.
False
On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records.
False
Selling on credit protects a company from the risk that some of its receivables will never be collected.
False
gross profit margin
Gross Profit/Net Sales
Accounts Receivable Turnover
Net Sales / Average Net Accounts Receivable
CHECKS ON RECORDED AMOUNTS
Recorded amounts should be checked by an independent person to determine that amounts are correct and that they correspond to properly authorized activities
A construction company stores large steel girders in an open yard surrounded by a 5-foot fence and stores welding supplies in a controlled-access, tightly secured concrete building.
Safeguards over assets and records
The extent of access to the many segments of the company's computer system is tightly controlled by individual identification cards and passwords that change at regular intervals.
Safeguards over assets and records
The person in the controller's office who prepares and mails checks to suppliers cannot make entries in the general ledger system.
Segregation of duties
CLEARLY DEFINED AUTHORITY AND RESPONSIBILITY
The authority to perform important duties is delegated to specific individuals and those individuals should be held responsible for the performance of those duties in the evaluation of their performance
buying inventory
The first stage of the operating cycle
paying for inventory
The second stage of the operating cycle is
selling inventory
Third stage, produces receivables
A primary advantage of the allowance method to account for bad debts is that it supports the matching principle.
True
Accounts receivable are shown on the balance sheet at their net realizable value.
True
Because the allowance method results in better matching, GAAP requires its use rather than the direct write-off method, unless bad debts are immaterial.
True
If the bank credits a customer's account, then that customer's cash balance increases.
True
In a sound system of internal control, cash receipts should be deposited daily.
True
Money market accounts with original maturities of less than 90 days are cash equivalents.
True
Replenishment of petty cash does not impact the balance of the petty cash fund.
True
The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.
True
The amount of interest paid is a function of three variables: the amount borrowed, the interest rate, and the length of the loan period.
True
The establishment of a petty cash fund has no effect on the company's total cash balance.
True
The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.
True
The stronger the system of internal control, the higher the accuracy of the company's accounting records and financial reports.
True
The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.
True
outstanding check
a check issued and recorded by the business that has not been "cashed" by the recipient of the check
an example of a contra-asset is
allowance for bad debts
deposit in transit
an amount received and recorded by the businesses, but has not been recorded by the bank in time to appear on the current bank statement
recorded amounts should be checked by an independent person to determine that amounts are correct and authorized
checks on recorded amounts
Division managers are evaluated annually on the basis of their division's profitability.
clearly defined authority and responsibility
if a company needs cash fast, they can
factor their receivables
Sales Allowances
given when customer returns good as unsatisfactory but agrees to keep the goods if the seller will make a price allowance.
what GAAP principal does the direct write off method break
matching principal
net profit margin
net income/net sales
accounts receivable-allowance for doubtful accounts=
net realizable value
operating margin
operating income/net sales
TRANSACTIONS RECORDED BY BUSINESS, NOT BANK
outstanding check deposit in transit
Internal Controls
policies and procedures established by top management and the board of directors to provide reasonable assurance that the company's objectives are being met
top management of publicly traded companies have an increased responsibility for a systems of internal controls
sarbanes oxley act
Employees with access to the accounting records are not permitted to open the mail because it contains many payments by check from customers.
segregation of duties
accounting and cash collection should be properly separated
segregation of duties
TRANSACTIONS RECORDED BY BANK, NOT BUSINESS
service charges NSF checks debt memos credit memos
ADEQUATE DOCUMENTS AND RECORDS
summary records and their underlying documentation must provide information about specific activities and help in the evaluation of individual performance
Control Environment
the collection of environmental factors that influence the effectiveness of control procedures
Control activities
the policies and procedures top management establishes to help ensure that its objectives are met
Sarbanes-Oxley Act of 2002
top management of publicly-traded corporations have an increased responsibility for a system of internal controls that ensures the reliability of the financial statements.
T/F: cash is recorded on both the balance sheet and statement of cash flows
true
T/F: direct write off is not GAAP compliant
true
T/F: the accounting system and internal control system are really one integrated system
true
T/F: the more liquid an asset is the more likely it is to be stolen
true