Accounting 1 Exam 3

Use the balance sheet and income statement to evaluate a firm's performance

1. Analysis 2. Interpretation 3. Evaluation

Limitations of Financial Analysis

1. Assumes one can predict the future using past data 2. Uses historical cost information (neglects inflation) 3. Uses year-end data that may not be representative of the company's usual financial status 4. Allows companies that are in the same industry to be compared event when they are not really comparable 5. falis to recognize that a substantial amount of important information is not included in a company 's financial statements

How to reinstate an account

Acc Rec - whoever account (Debit) Allowance for Doubt Acc (Credit) Cash (Debit) Acc Rec (Credit)

W company sells products costing 3000 for a sales price of 5000 on account to Jill. Jill is given sales terms of 2/10, n/30

Acc Rec. 5000 Sales. 5000 CGS. 3000 Inventory 3000

Net Accounts receivable

Accounts receivable on balance sheet

How to write an account off?

Allowance for Doubtful Account (Debit) Acc Rec - whoever account (Credit)

The journal entry under the "Allowance" method includes

Bad debt Expense (Debit) Allowance for Doubtful Accounts (Credit)

Jill pays 6 days after she purchased the products

Cash 4,900 Sales Discount 100 Acc Rec. 5000

Quick assets include

Cash and account receivables

Does Allowance for Doubtful Accounts have a debit or credit balance?

Credit

Does bad debt Expense have a debit or credit balance?

Debit

Trend Index

Dollar amount in year studying/dollar amount in earliest period reported times 100

_______ ______ __ _____ on hand (because cash sitting in the checking account is unproductive because it is not earning any interest or dividends

Don't keep to much

Inventory Turnover, Average Collection Period measure

Inventory (Efficiency)

W company sells products costing 6,000 for a sales price of 10,000 on account to Jack

Journal Entry Acc Rec 10,000 Sales. 10,000 CGS 6000 Inventory. 6,000

_________ ____________ on hand to be able to meet day-to-day business needs as well as pay off any debt obligations

Keep enough

Debt Ratio measure

Leverage

Current Ratio and Quick Ratio measures

Liquidity

Accounts Receivable minus allowance for Doubtful Accounts equals

Net Accounts receivable

Categories of Internal Control

Physical Controls Authorization Independent Checks Documentation Separation of Duties

Gross Proft Margin, Net Profit Margin, ROA, ROE measure

Profitability

Jack Returns $1,000 of merchandise (that cost $600)

Sales Return 1,000 Acc. Rec. 1,000 Inven. 600 CGS. 600

Balance Sheet approach

a. Multiply Receivables by a historical percentage of uncollectibles - this is the desire balance in the Allowance account (want) b. Compare the figure from part "a" with the current balance in the allowance account (have) c. The amount for the journal entry is whatever it takes to get the current balance in the Allowance account to be the Desired balance in the Allowance account (need)

Income Statement Approach

a. Multiply sales by a historical percentage of uncollectibles b. This is the amount for the journal entry

Cash includes each of the following except: a. a postdated check. b. currency. c. money orders. d. funds in a checking account.

a. a postdated check

Which of the following is not one of the five components: a. segregation of duties b. risk assessment c. monitoring activities d. control activities

a. segregation of duties

Trend Analysis

also known as Horizontal Analysis

Common size analysis

also known as vertical analysis

Which of the following is true? a.Internal auditors are independent of the company they audit. b. Internal audits provide appraisals of a company's internal control. c. The company being audited cannot pay the external auditing firm since this would violate their independence. d. Outside parties prefer appraisals by internal auditors over those of external auditors since they know more about the company being audited.

b. Internal audits provide appraisals of a company's internal control.

Electronic funds transfer (EFT) involves transferring cash from one location to another using: a. armored trucks. b. computers. c. bicycle messengers. d. the mail service.

b. computers

Good internal control over cash received on account involves the mailroom doing each of the following activities except: a. Open the mail. b. Prepare the deposit receipt. c. Prepare the remittance list. d. Send checks to the treasurer.

b. prepare the deposit receipt

Vertical analysis

balance sheet items are presented das a percentage of total assets for that year; income statement items are presented as. percentage of total sales for that year

Internal controls do each of the following except: a. protect assets from theft. b. evaluate the performance of employees. c. guarantee the accuracy of the accounting records. d. increase the likelihood that any errors will be caught.

c. guarantee the accuracy of the accounting records.

Current assets include

cash, accounts receivables, and inventory

Cash in bank accounts such as

checking accounts

Each of the following is part of the fraud triangle except: pressure opportunity concealment rationalization

concealment

The allowance account is a _____ ______ _______

contra - asset account

Cash on hand consists of

currency, money orders, coins, and checks waiting to be deposited

Effective cash management involves all the following except: a. Manage accounts receivable. b. Manage inventory. c. Invest excess cash. d. Conduct internal audits.

d. Conduct internal audits.

Having one person responsible for the related activities of ordering merchandise, receiving the merchandise, and paying for the merchandise: a. provides increased security over the firm's assets. b. is an example of good internal control. c. is a good example of segregation of duties. d. increases the potential of fraud.

d. increases the potential of fraud

Restricted cash: a. must be shown as a current asset. b. must be shown as a noncurrent asset. c. is shown as a liability. d. is reported separate from unrestricted cash.

d. is reported separate from unrestricted cash.

Horizontal Analysis

financial statement items are presented as a percentage of their value in the base year

Unintentional mistakes and intentional mistakes in accounting are known as

fraud

Cash equivalents

highly liquid, interest bearing investments that have maturities of three months or less when purchased

Analysis

includes examination and testing

Evaluation

is making judgements and decisions about possible courses of actions based on analysis and interpretation

Internal control

is to help protect assets and increase reliability of accounting records. Recall that CPA auditors are now required to audit the effectiveness of a business' internal control system

Current assets are listed in order of

liquidity

Types of Ratios

liquidity, activity, leverage, profitability, market value

Bank lenders and creditors focus much on _________ and _________ ratios

liquidity, leverage

Interpretation

means understanding what you see

Quick ratio

measures liquidity

Stockholders and potential investors focus much on __________ and ___________ ratios.

profitability, market value

Bad debt expense must be ____________ in the _____ ________ as the related __________ were recognized.

recognized, same period, sales

Cash equivalents include

savings account, certificates of deposits, money market funds, and treasury bills and commercial paper