Exam 3 Accounting

cash over and short

- cash deposited equals total cash register tape, when it doesn't the difference is recorded in ______ - debit balance represents "other expense" and credit balance represents "other revenue"

control environment

- collection of environmental factors that influence the effectiveness of control procedures - recognizes an individual employee's goals may differ from the goals of other individuals and goals of the business

petty cash

- fund may be used to pay for items such as stamps or a cake - using checks to pay small amounts more costly than paying cash

transactions recored by bank, not business

- service charge - non-sufficient funds (NSF) - debt memos - credit memos

outstanding check

-check issued and recored by business that has not been "cashed" by recipient of the check - cause bank balance to be higher than the business's cash account balance

- discounts - returns - allowances

3 changes to sales revenue

- bank reconciliation - cash over and short - petty cash funds

3 key cash controls

1. identify the contract with the customer 2. identify the performance obligations in the contract 3. determine the transaction price 4. allocate the transaction prices to the performance obligations in the contract 5. record revenue or sales when, or as, the entity satisfies the performance obligation

5 step model for revenue recognition

false

A balance sheet approach to estimating bad debt expense is not permitted under GAAP (generally accepted accounting principles).

false

A good system of internal control requires that the physical custody of assets be separated from the accounting for those assets. This concept is known as safeguarding of assets and records.

true

A primary advantage of the allowance method to account for bad debts is that it supports the matching principle.

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.

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

On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records.

Section 302 of SOX

Principal executive and financial officers must certify that they are responsible for establishing and maintaining the system of internal control over financial reporting

true

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.

false

The lender of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

true

The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

false

The sole purpose for creating an internal control system is to deter embezzlement.

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

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

forces management to be engaged with respect to its internal controls

What is the main purpose of Sarbanes Oxley Act sec. 404

true

When a bank pays interest on a company's checking account balance, the bank will likely issue a credit memo.

false

When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.

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; reduces likelihood to conceal irregularities and increase likelihood to find irregularities

adequate documents and records

accounting records inside and outside of the business and summary records providing information for specific activities and help evaluate individual performance

net sales/ average net accounts receivable

accounts receivable turnover

gross method (sales return and allowances)

adjust when it happens

bank balance + deposits in transit - outstanding checks

adjusted bank balance

company balance + bank additions - bank deduction

adjusted company balance

cash equivalents

all highly liquid investments with an original maturity of 3 months or less at date of inception

deposit in transit

amount received and recorded by the businesses, but has not been recored by bank in time to appear on the current bank statement - cause bank balance to be smaller than the business's cash account balance

cash controls

authority to collect, hold, pay cash must be clearly assigned to specific individuals controlled designed record-keeping system and examined by objective party

clearly defined authority and responsibility

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

direct write-off method

bad debt expense is recognized when a specific account is deemed uncollectible

non-sufficient funds (NSF)

checks are checks that have been returned to the depositor because the funds in the issuer's account are not sufficient to pay the check (bounced check)

Internal Control System

consists of policies and procedures designed to make sure employees operate within the scope of their responsibilities and act for the good of the business

- clearly defined authority and responsibility - segregation of duties - adequate documents and records - safeguards over assets and records - checks on recorded amounts

control activities 5 categories

- transactions recorded by business, not by bank in time for bank statement - transactions recorded by the bank, not yet by business - errors in recording transactions on either set of records

difference between cash account balance and bank statement balance develop from 3 sources

yes

does everyone have a system for internal controls

- control environment - risk assessment - control activities - information and communication - monitoring

elements of internal controls

net method (sales returns and allowances)

estimate based on experience

service charges

fees charged by bank for checking account services - not recored until statement is received

buying inventory (good cash management keeps inventory levels low)

first stage of operating cycle

gross profit/ net sales

gross profit margin

- delay paying suppliers (company can earn as much interest on their cash as possible) - speeding up collection from customers (in order to invest the cash sooner) - earning the greatest return on an excess cash

how can a company manage its cash efficiently

errors

inevitable in accounting system and should be corrected immediately

information and communication

information must be communicated to appropriate employees in the organization

face value x rate x time

interest calculation

- operations are effective and efficient (operations objectives) - compliance with laws and regulations (compliance objectives) - financial reporting is reliable (reporting objectives)

internal controls establish to provide reasonable assurance that

operating margin

key ratio for financial analysts because it tells how much is left from a sales dollar after paying for the product and all its operations

allowance

late arrival, or any way that makes a product less valuable may be a reason for ______

gross method (sales transaction)

make assumption up front that the customer will not take discount

net method (sales transaction)

make the assumption up front that the customer will take the discount

allowance method

makes an estimate of uncollectible accounts at the end of each period

% of receivable and % of sales

methods for estimating bad debt

debt memos

might result if the bank makes a prearranged deduction from the business's account to pay a bill

true

money market accounts with the original maturities of less than 90 days are cash equivalents

net income/ net sales

net profit margin

accounts receivable - allowance for doubtful accounts (the amount we expect to receive in cash)

net realizable value formula

sales revenues - discounts, returns, allowances

net sales formula

accounting transactions

occur only when the fund is established and when it is replenished

false

on a bank reconciliation, outstanding checks are added to the cash balance per the bank statement

operating income/ net sales

operating margin

transactions recorded by business, not bank

outstanding check and deposit in transit

- balance sheet approach - aging analysis of A/R - different rates applied to different age categories - calculates the required final balance in the allowance account

percent of receivable

- income statement approach - credit sales (estimated bad debt %) - calculates the amount of bad debt expense to be recognized

percent of sales

start with "cash balance from bank statement" and "cash balance from company records" and produce identical adjusted cash balances

performing a bank reconciliation

safeguards over assets and records

physical protection of assets through fireproof vaults, locked storage facilities, keycard access, antitheft tags on merchandise also applies to computers

control activities

policies and procedures top management establishes to help ensure that its objective are met

risk assessment

procedures are designed to identify, analyze, and manage strategic risks and business process risks

monitoring

process of tracking potential/actual problems in the internal control system (supervising/internal audit)

accrual-basis accounting

recognizes revenue when a performance obligation or promise under a contract is satisfied (does not mean cash must be received)

checks and 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

one integrated system designed to meet the needs of a particular business

relationship between control activities and the accounting system

balance sheet

reports amount of cash and cash equivalents available at date

SOX Section 404 - statement of management's responsibility to establish and maintain internal controls - an assessment of the effectiveness of its internal controls

requires publicly traded companies to include in their annual report to stockholders an internal control report containing two items

credit memos

result if the bank collected a note receivable for the business

- purchase order - shipping documents - invoice - sale and it associated receivable recorded only when order, shipping, billing documents are all present

sales revenue, internal controls include the following documents and procedures

paying for inventory (delay payments as long as possible to earn more interest while keeping a good relationship with payee)

second stage of operating cycle

Committee of Sponsoring Organizations (COSO)

standard for understanding what good internal controls look like

2/10, n/30 2% discount if invoice paid within 10 days or total balance due in 30 days

standard notation to state discount and credit terms

false

the best response to an employee caught stealing from the company is to say "don't ever let me catch you doing that again!"

selling inventory (increase speed of receivable collections)

third state of operating cycle

Sarbanes Oxley Act

top management of publicly-traded corporations have an increased responsibility for a system of internal controls that ensures the reliability of the financial statements

- control function by identifying errors and providing an inspection of detailed records that deters theft - transaction detection function by identifying transactions performed by bank, so the business can make the necessary entries in its records

two purposes of bank reconciliation

bank reconciliation

use of a bank is one of the most important controls of cash; bank's accounting records and company's accounting records often disagree due to timing differences, these must be "reconciled" to ensure accounting records are consistent with bank's records

profitability ratios

used to try and measure the return the company is making on sales

- philosophy and operating style of management - personnel policies and practices of the business - overall integrity, attitude, awareness, actions of everyone in the business concerning the importance of control ("tone at the top")

what does control environment include

sales and receivables presented fairly according to GAAP

what is the end goal for internal controls for sales

- goods have been delivered - service has been performed

when do we earn revenue

false

when reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks

both balance sheet and statement of cash flow

where is cash reported