ACCT 2110 Exam 3

"sales discounts"

a contra-revenue account that is subtracted from sales when calculating "net sales"

operating margin

a 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

sale discounts for the buyer

a reduction to the cost of goods and services

sales discounts gross method

make the assumption up front that the customer will NOT take the discount

sales discounts net method

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

net profit margin=

net income / net sales

accounts receivable turnover=

net sales/average net accounts receivable

operations objectives

objectives that deal with the effectiveness and efficiency of company operations and determine how to allocate resources

reporting objectives

objectives to help ensure the accuracy, completeness, and reliability of company reports; improve decision making; and monitor company activities and performance

accounts receivable

"on account" "trade receivables"- result from sale of goods/services

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

what is the basis for the financial statements and other reports prepared for managers, owners, and others both inside and outside the business?

Accounting records

match each of the control activities: invoices received from outside suppliers are filed with purchased orders

adequate documents and records

accounting and reporting cash

cash is reported on both the balance sheet and the statement of cash flows

gross profit margin=

gross profit / net sales

match each of the control activities: 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

sales returns and allowances net method

estimate based on experience

COSO

Framework for enterprise internal controls (control-based approach)

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

interest calculation

face value x rate x time

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 recognizes

that an individual employee's goals may differ from the goals of other individuals and the goals of the business

sale discounts for the seller

the cash is more quickly available and collection costs are reduced

true/false: accounts receivable are shown on the balance sheet at their net realizable value

true

Methods for Estimating Bad Debts

% of receivables % of sales

% of Receivables

- Balance Sheet Approach - Aging analysis of A/R- Different rates applied to different age categories - Calculates the required balance in the allowance account

% of Sales

- Income statement approach - Credit sales * Estimated bad debt % - Calculates the amount of bad debt expense to be recognized

short-term investments

- Keep bank cash balances to a minimum since most bank accounts earn relatively small amounts of interest. - Accordingly, short-term investments are purchased with temporary cash surpluses. - The value and composition of short-term investment portfolios change continually in response to seasonal factors and other shifts in the business environment.

paying for inventory

-The second stage of the operating cycle is paying for inventory -A good cash management principle is to delay payments as long as possible while maintaining a good relationship with the payee -The longer a company keeps cash, the more interest it can collect

elements of internal control

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

promissory note

-maker: promises to pay -payee: receives payment -recorded at face value -stronger legal claim/requires interest

the control environment included

-philosophy and operating style of management -personnel policies and practices of the business -the overall integrity, attitude, and actions of everyone in the business concerning the importance of control

management of receivables

-screening customers -determining credit terms and limits -monitoring collections

factoring receivables

-sell receivables; factor changes a % -immediate cash is received -factor assumes rights of collection along with risk of uncollectability -recourse/non-recourse -securitization; package factors receivables and sell them

selling inventory

-third stage of the operating cycle -good cash management suggests increasing the speed of receivable collections -many companies sell their receivables rather than waiting for customers to pay

internal controls for sales

1) purchase order required for sales 2) shipping & billing documents based on purchase order 3) only record sale & receivable when we have purchase order, shipping & billing documents 4) sales returns & allowances must follow proper procedures

types of receivables

1. Accounts receivable 2. Notes receivable 3. Other receivables

bank reconciliation

1. a control function by identifying errors and providing an inspection of detailed records that deters theft 2. a transaction detection function by identifying transactions performed by the bank, so the business can make the necessary entries in its records

3 key cash controls

1. bank reconciliation 2. cash over and short 3. petty cash funds

cash short and over

1. cash receipts should be deposited in a bank daily 2. amount deposited = sum of cash register tapes 3. if differences occur, the discrepancy is recorded in an account called cash over and short 4. one common source of cash over and short is errors in making change for cash sales

5 categories of control activities

1. clearly defined authority and responsibility 2. segregation of duties 3. adequate documents and records 4. safeguards over assets and records 5. checks on recorded amounts

how can a company manage its cash efficiently?

1. delaying paying suppliers (so a company can earn as much interest on their cash as possible) 2. speeding up collection from customers (in order to invest the cash sooner) 3. earning the greatest return on any excess cash

Methods of Accounting for Uncollectible Accounts

1. direct write off 2. allowance method

three changes to sales revenues

1. discounts 2. returns 3. allowances

We have earned the revenue when either

1. goods have been delivered or 2. a service has been performed

5 Step Model for Revenue Recognition

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

performing a bank reconciliation

1. start with "cash balance from bank statement" and cash balance from company records" 2. these two balances are adjusted as necessary to produce identical "adjusted cash balance" 3. bank balance + bank additions - outstanding checks= adjusted bank balance 4. company balance + bank additions - bank deductions= adjusted company balance 5. these adjusted balances should agree!

differences between the cash account balance and the bank statement balance develop from 3 sources

1. transactions recorded by business, not by the bank 2. transactions recorded by the bank, not yet by business 3. errors in recording transactions on either set of records

2/10, n/30

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

average # of days A/R are on the books=

365/accounts receivable turnover

net realizable value

Accounts Receivable - Allowance for Doubtful Accounts

timing of revenue recognition

GAAP requires accrual-basis accounting, which recognizes revenue when a performance obligation or promise under a contract is satisfied

________________________ reduces the likelihood that unintentional record-keeping errors will remain undiscovered

Segregation of duties

__________________________ reduces the likelihood that records could be used to conceal irregularities and increases the likelihood that irregularities will be discovered

Segregation of duties

buying inventory

The first stage of the operating cycle

other receivables

Various forms of non-trade receivables, (interest receivable, notes to company officers, tax refunds, etc)

outstanding check

a check issued and recorded by the business that has not been "cashed" by the recipient of the check

errors

accidental errors in recording transactions or applying accounting principles

match each of the control activities: 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 make entries to inventory records and procedures periodic reports or sales and shipments

adequate documents and records

sales returns and allowances gross method

adjust when it happens

bank reconciliation adjusting journal entries

adjustments are necessary for any company errors or items such as bank charges or interest that the company does not find out about until receiving the bank statement

classification of receivables

amounts due from individuals or companies and the expectation that cash will be received

petty cash

an amount of cash kept on hand and used for making small payments

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

information and communication

an internal control system will be unable to help a company achieve its objective unless good information is gathered on a timely basis this information must be communicated to the appropriate employees in the organization

business process risks

arise out of the internal processes of the company, specifically how the company allocates its resources to meet its objectives

direct write-off method

bad debt expense is recognized when a specific amount is deemed uncollectible expense is often recognized in a different period than the revenue associated with the sale violates matching principle

safeguards over assets and records

both assets and records must be secured against theft and destruction

match each of the control activities: 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

match each of the control activities: cash registers display the price of each item purchased to the customer as it is recorded and produce a customer receipt that described each item and gives its price

checks on recorded amounts

clerical checks, reconciliations, comparisons of asset inspection reports with recorded amounts, computer-programed controls and management review of reports

checks on recorded amounts procedures

Non-sufficient funds checks

checks that have been returned to the depositor because the funds in the issuer's accounts are not sufficient to pay the check

match each of the control activities: only the cashier assigned to the cash register is allowed to perform transactions

clearly defined authority and responsibility

match each of the control activities: division managers are evaluated annually on the basis of their division's profitability

clearly defined authority and responsibility

control environment resolves

conflicting incentives in an ethical manner that promotes organizational objectives is highly dependent on the tone at the top

credit memos

could result if the bank collected a note receivable for the business

true/false: no special internal control procedures are necessary with a petty cash fund because the amount is so small

fale

true/false: Net sales= total credit sales - sales discounts - sales returned and allowances

false

true/false: a balance sheet approach to estimating bad debt expense is not permitted under GAAP

false

true/false: a check written by a company but not yet presented to the bank for payment is called a check in transit

false

true/false: an accounting system must be computerized in order to implement any internal control procedures

false

true/false: if a company accepts a major credit card such as Visa from a customer, then the company is responsible for the amount of the sale in case of nonpayment from a cardholder

false

true/false: if a company has an internal audit function, it does not need to have external auditors

false

true/false: if a company hires honest employees and its top management act with integrity, NO internal control procedures will be necessary

false

true/false: if the bank debits its customer's checking account, then the customer's cash balance increases

false

true/false: on a bank reconciliation, outstanding checks are added to the cash balance per the bank statement

false

true/false: selling on credit protects a company from the risk that some of its receivables will never be collected

false

true/false: the lender of a note recognizes a note payable on the balance sheet and interest expense on its income statement

false

true/false: the longer a customer's account balance remains outstanding, the greater the likelihood that it will be collected in the near future

false

service charges

fees charged by the bank for checking account services

notes receivable

formal debt instrument- normally requires interest sometimes these can also be trade receivables

if information is not _______________________ and ______________________________, then management may not become aware of problems until its too late and returns and complaints are made by dissatisfied customers

gathers and communicated

clear delegation of authority and responsibility motivates

individuals to perform well because they know they are accountable for their actions

allowance method

makes an estimate of uncollectible accounts at the end of each period create an "allowance" account that is then decreased when actual write-offs occur better matching of expenses and revenues

debt memos

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

compliance objectives

objectives to help the company comply with all applicable laws and regulations

operating margin=

operating income / net sales

Internal control system

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

strategic risks

possible threats to the organization's success in accomplishing its objectives and are external to the organization

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

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

analyzing sales

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

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

sales discounts

reduction of the normal selling price and is attractive to both the seller and buyer

importance of receivables

represents a significant amount of money trade receivables represent sales revenue that has been recognized, but not collected or realized in cash

Section 404 SOX

requires publicly traded companies to include in their annual report to stockholders and internal control report contains a statement of management's responsibility to establish and maintain internal controls as well as an assessment of the effectiveness of its internal controls FORCES management to be engaged with respect to its internal controls Requires an annual audit of the company's internal control structure and the assessment provided by management

Sales Returns and Allowances

return of defective product or price allowance for minor defects late arrival or any way that makes a product less valuable may be a reason for an allowance

________________________ requires physical protection of the assets as well as access controls for computers

safeguarding

match each of the control 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

match each of the control activities: 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

match each of the control activities: employees with access to the accounting records are not permitted to open the mall because it contains many payments by check from customers

segregation of duties

valuation/amount of revenue recognized

the appropriate amount of revenue to recognize is generally the cash received or the cash equivalent of the receivable

cash controls

the authority to collect, hold, and pay cash must be clearly assigned to specific individuals whenever feasible, cash-handling activities and cash record-keepings activities should be assigned to different individuals

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

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

cash management

the routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family

transactions recorded by business not bank

timing differences

true/false: a debit memo may be issued in the monthly bank statement in order for the bank to notify a company that a service charge has been assessed on the company's account

true

true/false: 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

true/false: the accountant must make adjusting journal entries for all items in the book section of the bank reconciliation

true

true/false: the establishment of a petty cash fund has no effect on the company's total cash balance

true

true/false: the higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash

true

true/false: the lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement

true

transactions recorded by banks not business

unknown/unrecognized by the business