Acct 2110 cornette test 2 book notes

T/F Trade and quantity discounts are recorded separately in the accounting records

FALSE; ARE NOT RECORDED separately

T/F The Matching Principle requires expenses to be recorded and reported separate from when revenue is earned?

False; expenses be recorded and reported in the same period as the revenue that it helped to generate

T/F When closing entries (step 7), we close the balances of the temporary accounts to stockholder's equity.

False; it's not stockholder's equity, we close it to retained earnings

T/F GAAP requires receivables to be known at net realizable value on the income statement

False; on the balance sheet

T/F Adjusting entries for accruals always decrease both a balance sheet and income statement account

False; they increase the accounts

Example of accrued revenue:

FedEx has packages still in transit at the end of the accounting period, meaning its only partially completed its service. It has earned revenue but not received cash

Whats the formula for interest accrual?

Interest accrual= face * rate* time

Adjusting entries?

Journal entries made at the END of an accounting period to record the completed portion of partially completed transactions.

When we offer discount, we are willing to accept a ________ net income for those.

LOWER

The earnings process is completed when:

- delivery has occurred or services have been provided

How can companies increase the speed of cash collection on receivables by?

- factoring, or selling, their receivables

Companies often induce customers to buy by offering:

- sales discounts - sales returns - sales allowances

The estimate for uncollectibles is made by using either:

- the % of credit sales method - aging method

Revenue is recognized when:

- the earning process is complete - collection has occurred or is reasonably certain to occur

What 2 conditions have to be met to make revenue recognized?

1. The revenue has been earned 2. The collection of cash is reasonable assured ** NOTICE: revenue is recorded when these 2 conditions are met, regardless of when cash is received

2 methods to record bad debt expense:

1. direct write-off method 2. allowance method

What is the 3 main ideas when establishing internal controls?

1. make sure operations are efficient 2. abide by rules and regulations 3. financial reporting must be reliable (looking at how reliable the system is to make sure its capturing all the revenues, expenses, assets, liabilities & equity's recorded and reliable)

COSO developed the 5 components of an internal control system:

1. the control environment 2. risk assessment 3. control activities 4. information and communication 5. monitoring activities

The month-end bank statement showed a $42,600 ending balance for Hurry Corporation's cash balance. Use the following items to calculate the amount of Hurry's actual ending cash balance Outstanding checks $4,240 Bank service fee 150 Deposit in transit 780

39,140 Add deposit in transit, subtract outstanding checks

Which of the following best describes the order of the accounting cycle? A. Journalize, Post, Adjust, Close B. Journalize, Adjust Post, Close C. Journalize, Post, Close, Adjust

A

Which statements are true? a. Adjusting entries are necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid. b. Adjusting entries always affect at least one revenue or expense and one asset or liability account c. The cash account with always be affected by adjusting journal entries d. Adjusting entries can be classified as either accruals or deferrals

A, B, D

What are the 2 types of adjusting entries?

Accruals and deferrals

What is petty cash?

Allows a set amount of money to be put away (usually small) to reimburse people if they lost something,etc.

What is the process that ensures that the accounting records are consistent with the bank's accounting records?

Bank reconciliation, any differences must be "reconciled"

Cash Basis of Accounting?

Cash basis- * Revenue is recorded when cash is received, regardless of when its earned. * Expenses are recorded when cash is paid, regardless of when incurred.

What is the revenue recognition principle?

determines when revenue is recorded and reported

The % of credit sales method .....

estimates the bad debt expense directly

How are Notes receivable recognized?

for the amount of cash borrowed or goods/services purchased

** COSO is the ...?

framework which is the rubric used to see to evaluate another companies internal controls

Sometimes return might happen after discount period, so what do you do?

as the situation present themselves is how we make those transactions

What is an outstanding check? (transactions recorded by the business, but not yet by the bank)

check issued and recorded by the business that has not been "cashed" by the recipient of the check. - ex: when check is written during December, but not cashed until January, the business's Dec 31 cash balance will be lower than its account balance on the Dec 31 bank statement

What does deferred (pre-paid) Expenses adjust?

debit the prepaid asset & credit cash... then debit the expense & credit the prepaid asset

Whats the difference between deferred revenues & deferred expenses?

def rev.: Liabilities arising from the receipt of cash for which revenue has not yet been earned def exp: Assets arising from the payment of cash which have not been used or consumed by the end of the period

"Realizable" describes a situation where....

non cash resources (like inventory) are readily convertible into known amounts of cash

What is depreciation?

process of allocating the cost of an asset to expense over its useful life

Define A/R Turnover....

provides a measure of how many times average trade receivables are collected during the period

** SOX is the..?

required piece of law

The aging method estimates....

the ending balance needed in the allowance for doubtful accounts, and bad debt expense follows

What is the purpose of all adjustments?

to make sure revenues and expenses get recorded in the proper time period.

T/F The adjusted trial balance is the primary source of information needed to prepare the financial statements

true

Does accrual accounting record both cash and non cash? Or which one?

yes

What does management put into place to control employees' activities?

internal controls system

What is the appropriate amount of revenue to recognize?

the cash received or the cash equivalent of accounts receivable

Define sales allowances...

when a customer agrees to keep goods with minor defects if the seller reduces the selling price

GAAP required accounts receivable to be known at their ...?

"net realizable value"

Sales returns & allowances & sales discounts are:

**3 separate accounts but all contra-revenue accounts because they go against sales

What does Section 404 of the Sarbanes Oxley Act require?

- ** Statement of management's responsibility to establish and maintain internal controls (there would be internal report) - An assessment of the effectiveness of its internal controls

Receivables are classified along three different dimensions:

- accounts and note receivable - trade and noontide receivables - current and concurrent receivables

What are the 3 cash controls?

1. Bank reconciliation 2. Cash over & short 3. Petty Cash

Accrual basis accounting recognizes revenue when it is....

1. Realized or Realizable 2. Earned

What are the 2 types of Sales Discounts?

1. Trade discount- ex: discount to customers who purchase goods for resale rather than for use 2. Quantity discount- ex: a 32 oz soft drink doesn't cost doubt what a 16 oz one costs at a restaurant

Deposits made by a company but not yet reflected in a bank statement are called? a. deposits in transit b. debit memo c. credit memo

A

The retained earning statement is prepared from the.... a. dividends b. revenue and expense accounts c. retained earnings d. net income

A & D

The balance sheet is prepared using the... . a. beginning retained earnings b. revenue and expense accounts c. ending balance of retained earnings d. net income

C. ending balance of retained earnings from the R/E statement

If a discount is taken a debit or credit is made to the Sales Discounts?

DEBIT

T/F Cash is always affected by adjustments

False; cash is never affected

Allowance method is or is not accepted by GAAP?

IT IS

Dallas Company loaned $10,000 to Ewing Company on December 1, 2013. Ewing will pay Dallas $720 of interest ($60 per month) on November 30,2014. Dallas's adjusting entry at December 31, 2013, is:

Interest Receivable...........60 Interest Revenue.......... 60

Operating Cycle (cash management): Why is it an advantage to delay paying suppliers?

It is advantageous to delay paying suppliers, because the company can then earn interest on the money that is owed (unless the supplier offers a discount for prompt payment).

2 basic approaches to writing off accounts directly:

Not permitted by GAAP because it violates the matching principle

Closing the accounts: what accounts belong to the temporary accounts (used to collect activities of only one period)?

Revenues, Expenses, and Dividends

T/F All adjusting entries will affect at least one income statement account and one balance sheet account

TRUE

T/F Cash equivalent is any investment that is readily converted into a known amount of cash and has an original maturity of 3 months or LESS

TRUE problem 4-10 in chapter 4

Difference between Trade or Nontrade Receivables?

Trade- due from customers purchasing inventory Nontrade- transactions not involving inventory (interest receivable or cash advances to employees)

T/F Cash basis accounting does NOT link recognition of revenues and expenses to the actual business activity but rather the EXCHANGE OF CASH

True

T/F Sound internal control practice dictates that cash disbursements should be made by check, unless the disbursement is very small.

True

T/F Realized: The seller's price to the buyer is fixed and determinable.

True; (if we've agreed on a #)

2 methods for estimating bad debt:

1. % of Receivables- we look at the receivables (ON BALANCE SHEET) is to come up with estimate of what we need to have in the allowance account NOT calculating the amount of adjustment, only calculating what we are going to have in our allowance account 2. % Of Sales- that's the amount of bad debt expense

What is a deposit in transit?(transactions recorded by the business, but not yet by the bank)

A deposit in transit is an amount received and recorded by the business, but which has not been recorded by the bank in time to appear on the current bank statement. - Deposits in transit cause the bank balance to be smaller than the business's cash account balance.

What is the Expense Recognition (matching) Principle?

An expense is recorded when it is incurred, regardless of when cash is paid.

Closing the accounts: what accounts belong to the permanent accounts (their balances are carried forward from the current accounting period to future accounting periods)?

Assets, Liabilities, and Stockholders' Equity

When customers do not pay their accounts receivable, __________ results.

Bad debts (uncollectible accounts)

What is "Channel Stuffing"?

Companies ship more goods to a customer than the customer ordered near the end of a period.

Difference between Current or Noncurrent Receivables?

Current- accounts receivable due in 30-60 days w/out interest Noncurrent- notes receivable due in 3-12 months w/ interest

The closing process.... A. Updates the retained earning account B. Prepares all revenues and expense accounts for the next period C. Puts any balance in the dividends account to zero D. All of the above

D. All

Which of the following is not true of the Sarbanes-Oxley Act? a. It required an internal control report b. it was passed after many major corporations failed as a result of fraudulent activity c. It required that management obtain an audit of internal control d. it sought to restore management's confidence over financial reporting

D. No it didn't , it sought to restore financial statements users confidence over financial reporting

In Petty Cash transactions always...

Debit Credit Petty cash Miscellaneous Expense Cash

What does accrued revenues ALWAYS adjust?

Debit Receivable & credit Revenue - result in an increase to a revenue account and an increase to an asset account

What structure will depreciation adjustments always have?

Depreciation Expense $$ Accumulated Depreciation $$

Define securitization?

Receivables may be packaged as financial instruments or securities and sold to investors

What's the difference between accrued revenues & expenses?

accrued revenues: Previously unrecorded revenues that have been earned but for which no cash has been received yet accrued expenses: Previously unrecorded expenses that have been incurred but not paid in cash yet

Accrual-basis Accounting? (accrual accounting)

alternative to cash basis, required by GAAP * transactions recorded when they occur * Revenue is recognized as it is earned & expenses are recognized when they are incurred.

Most companies record the sale and the associated receivable when?

at the gross (pre-discount) amount of the invoice. (gross method)

The income statement is prepared from the.... a. dividends b. revenue and expense accounts c. retained earnings d. net income

b. revenue and expense accounts

A special case of selling receivables is accepting...

credit cards like MasterCard and Visa

When you have a receipt that's under your deposited amount you? (cash over and short)

credit cash over and short

Business activity is best described as.... a. lacking deviation b. predictable c. noncyclical d. cyclical

cyclical (recurrent)

Cash is reported on? a. the income statement b. the income statement & cash flows c. the balance sheet d. the balance sheet & cash flows statement

d. the balance sheet and cash flows statement

What does deferred (Unearned) revenue adjust?

debit Cash & credit Unearned Revenue .... then when revenue is earned, debit unearned revenue & credit revenue

What does accrued expense usually adjust?

debit accrued expense & credit Payable

When you have a receipt that's higher than your deposited amount you? (cash over and short)

debit cash over and short