Accounting Test 2
Determining the amount and timing for a contract
1. Identify the contract with the customer 2. Identify the performance obligation 3. Determine the transaction price 4. Allocate the transaction price to the performance obligation 5. Recognize revenue when the entity satisfies the performance obligation
Days Sales Outstanding
365 days a year divided by AR turnover ratio Gives how many days on averages between AR turnovers
Petty Cash
A small cash fund used for incidentals It is managed by a custodian who is responsible for all transactions
Internal Control
A system designed to prevent fraud and financial statement errors
Fraud Facts
A typical organization loses 5% of revenue to fraud, worldwide is $3.7 trillion 23% of reported fraud is at least $1 million Most frauds reported by: accounting, operations, sales, executive & upper management, customer service and purchasing departments Most fraudsters are one-time offenders with a clean employment history
Debit 300000 to Accounts Receivable and 225000 to COGS, Credit 300000 to Widget Sales and 225000 to Inventory
ABC Corporation sold XYZ Corporation 300000 of widgets that had a cost of 225000. The widgets were sold 2/10, n/30 Record the journal entry for the sale
Accounts Receivable
AKA trade receivables Arise from credit sales and services to customers in the normal course of business This accounts balance in the general ledger is an aggregate ac=mount that reflects the AR transactions of all customers
Limited Access
Access should be limited to job duties Inventory to be safeguarded Information technology safeguarded Data access limited
Balance Sheet Approach
Aging of Receivables Method Based upon the number of days AR are outstanding A percentage is applied to the gains status based upon past history The percentages for each aging bucket are calculated to a total amount The amount arrived at is compared to the allowance account before the adjustment Allowance account is then adjusted to reflect the total
A
All of the following are control procedures, except: a. Sarbanes-Oxley reforms b. Adequate records c. Assignment of Responsibilities d. Separation of duties
C
All of the following are controls for cash received over the counter, except: a. a printed receipt must be given to the customer b. the customer should be able to see the amounts entered in the cash register c. the sales clerk must have access to the cash register tape d. the cash drawer should open only when the sales clerk enters an amount on the keys
C
All of the following are objectives of internal control, except: a. to comply with legal requirements b. to ensure accurate and reliable accounting records c. to maximize net income d. to safeguard assets
Adequate Records
All transactions should be supported by proper documentation, hard or soft copy Keeping track by consecutive numbers for checks and other documents, to ensure none are missing
Deduct from the book balance
An NSF check from a customer for $500 appears on the March bank statement
Contract
An agreement between two parties that creates an enforceable right or performance obligation Can be written or implied, written is ideal
Return Example
Apple estimates 1% of sales will be returned Sales were $200 mil Cost estimated at 60% Sales Returns D 2 mil Sales Refunds Payable C 2 mil Inventory Returns D 1.2 mil COGS C 1.2 million 1,800,000 actually retunred Sales Refunds Payable D 1.8 mil Cash of AR C 1.8 mil Inventory (60% of sale) D 1.08 mil Inventory Returns Estimated 1.08 mil
Quick Ratio
Asset Test Ratio Cash and cash equivalents plus short term investments plus AR divided by current liabilities Shows what can be paid short term
Fidelity Bonds
insurance against losses from employee theft
Subsidiary Ledger
shows the individual account for each customer and how much they owe
Lower of Cost or Market Rule
the amount assigned to inventory cannot be greater than the market amount If book value is greater than market, an adjustment would need to be made to cost of goods sold
Cost of Goods Sold
the cost paid for the inventory becomes: The direct cost of the units sold
Add to the book balance
the march bank statement reports $25 of interest earned
A
At the end of the year, before adjustments are made, ABC Corp. reports AR of $20,000 and a credit balance in Allowance for Uncollectible Accounts of $1450. Sales for the year were $300,000. Historically, 1% of sales have been uncollectible. After all year-end entries have been made, the net amount of AR would be: a. $15550 b. $20000 $17000 d. $18550
C
At the end of the year, before adjustments are made, ABC Corp. reports AR of $20,000 and a credit balance in Allowance for Uncollectible Accounts of $1450. Sales for the year were $300,000. Historically, 1% of sales have been uncollectible. Using percent of sales method, the amount of uncollectible expense for the year would be: a. $1550 b. $4450 c. $3000 d. $200
D
Before paying an invoice for goods received on account, the controller or treasurer should ensure that: a. the company is paying for goods they actually received b. the company has not already paid the invoice c. the company is paying for the goods it ordered d. all of the above
Cost of Goods Sold Model
Beginning Inventory + Purchases = Cost of Goods Available - Ending Inventory =
Delays
Buying on account ___ payment and gives the buyer time to sell inventory
Controls for Cash Receipts
Cash Sales - at point of sale, automatically recorded. The sale amount and cost of goods sold are tracked by barcoding At the end of the shift, the employee turns in cash and the amount of cash turned in is compared to the tape register transactions
Bank Reconciliation
Companies generally do not keep cash on hand other than a small amount of petty cash Banks provide a monthly bank statement which can then be compared to the book transactions to ensure accuracy If the bank reconciliation is performed by an authorized person, it is good internal control
Components of Internal Control
Control Environment Risk Assessment Information Systems Control Procedures Monitoring of Controls
Average Cost Method
Cost of Goods Available/ Number of Units Available Provides a middle ground measure of ending inventory and cost of goods sold Writes inventory down when its net realizable value drops below its historical cost
D
Cost of Goods Sold will appear on which financial statement? a. Statement of Retained Earnings b. Balance Sheet c. Statement of Cash Flows d. Income Statement
Inventory Turnover Ratio
Cost of Goods sold/ average inventory Gives you a numeric number of how many times a year inventory is turned over
C
Cost of goods sold: a. will always be lower when using LIFO rather then FIFO, during period of riding prices b. will be the same using LIFO or FIFO c. is the number of units of inventory sold multiple by cost per unit of inventory d. is the number of units of inventory purchased multiple by cost per unit of inventory
Credit Card Payments come at a cost
Credit Card processors charge a fee Ex: Mr. Smith has a balance of $1000 Cash = D 975 Credit Card Fee = D 25 Accounts Receivable = C 1000
Current ratio
Current assets divided by current liabilities 1.5 considered good Measures how many time current assets can cover current liabilities
Working Capitol Ratio
Current assets minus current liabilities Can current assets cover the current liabilities?
Add to the bank statement balance
Deposits in transit total $5,640
Days Inventory Outstanding
Divide 365 days by inventory turnover ratio to figure out how many days it takes to turn over inventory
Verbal contracts are not enforceable
Do contracts need to be written?
C
Each of the following documents is a control for a bank account except: a. bank reconciliation b. signature card c. geographic location of ATMs d. bank statement
Reconciliation Balance of bank Statements
Ending Balance + Deposits In Transit - Outstanding Checks What is on one but not on the other?
First In First Out
Ending inventory is at the latest unit price, the earlier costs were relieved first Results in a cost of ending inventory that is close to the current cost Maximizes reported income Writes inventory down when its net realizable value drops below its historical cost
Limits of Internal Control
Even by taking all possible precautions, fraud can still occur Collusion- two or more people conspire to deceive Negligence
Rising
FIFO is better in times of ___ prices.
Disclosures
Footnotes to the financial statements that further explain the amounts on the financial statements Ex: footnotes for inventory would explain method used; inventory method cannot be changed unless approved
Maturity Value
For note receivables The amount borrowed plus any unpaid interest amount that is due
Principle
For note receivables The amount that was borrowed
Maturity Date
For note receivables The date that the note is due, when it needs to be repaid
Term
For note receivables The length of time from when the note is signed to due date
Interest Rate
For note receivables the cost of borrowing money (interest quoted as an annual %)
Calculating the Cost of Inventory Units
GAAP Allows for these 4 methods: Specific Unit Cost Average Cost First-In, First-Out (FIFO) Last-in, First-out (LIFO)
Sales Returns and Allowances
GAAP requires that a provision be made to account for the expected returns Liability, slaes, refunds payable is created An adjusting journal entry is required at the end of a period
Cash Equivalents
Government Securities Time Deposits Low risk equity securities
Gross Profit Margin %
Gross Profit(Sales-COGS)/ Sales Must be sufficient to cover operating expenses
A
Gross profit plus COGS equals: a. Sales Revenue b. purchases c. beginning inventory d. ending inventory
Added to book
How would the following be treated on a bank reconciliation? Bank collections (credit on bank statement)
Subtracted from book
How would the following be treated on a bank reconciliation? Bank service charges
Either added or subtracted
How would the following be treated on a bank reconciliation? Book errors
Subtracted from book
How would the following be treated on a bank reconciliation? Cost of printing checks
Credits added, Charges Subtracted
How would the following be treated on a bank reconciliation? EFT credits or charges
Added to book
How would the following be treated on a bank reconciliation? Interest revenue earned on account
Subtracted from book
How would the following be treated on a bank reconciliation? NSF checks
Allowance for Uncollectible Accounts
Ideally, 100% of sales an account would be collected, however it is likely that a certain % of on account sales will not be collected GAAP required making an allowance for unexpected uncollectible accounts based on past experience and current knowledge CONTRA-ASSET account
D
If a bank reconciliation included a deposit in transit of $790, this reconciling item would include: a. a credit to prepaid insurance for $790 b. a debit to cash of $790 c. a credit to cash of $790 d. no entry is required
D
If a bookkeeper mistakenly recorded a $34 deposit as a $43, the error would be shown on the bank reconciliation as a: a. $9 addition to the book balance b. $43 deduction from the book balance c. $43 addition to the book balance d. $9 deduction from the book balance
D
If the adjusting entry to accrue interest on a Note Receivable is omitted, then: a. Assets, Net Income and Stockholders Equity are overstated b. Assets are overstated, Net Income and Equity are understated c. Liabilities are understated, Net Income and Equity are overstated d. Assets, Net Income and Stockholders Equity are understated
B
In a bank reconciliation, an EFT cash payment is: a. deducted from the bank balance b. deducted from the book balance c. added to the book balance d. added to the bank balance
B
In a bank reconciliation, an outstanding check is: a. Added to the bank balance b. Deducted from the bank balance c. Deducted from the book balance d. Added to the book balance
C
In a bank reconciliation, interest revenue earned and shown on the bank statement is: a. deducted from the book balance b. added to the bank balance c. added to the book balance d. deducted from the bank balance
B
Jerry Inc. received a four-month, 6%, $2400 note receivable on March 1. The adjusting entry on March 31 will include: a. A debit to cash for $144 b. A credit to Interest Revenue for $12 c. A debit to Interest Receivable for $144 d. A debit to Interest Receivable for $48
Lowering
LIFO is better in times of ___ prices.
Red Flags for Fraud
Living beyond means, having financial difficulties and unusually close associations with vendors and/or customers
Fraud Triangle
MOR: Motive- Need & Greed Opportunity- weak internal controls, not properly segregating duties, employees have improper access to assets, upper management has weak ethics Rationalization- everyone else is doing it
Proper Approvals
Management should approve all transactions Sales to customers on account to be approved by credit department Transaction authority limited by dollar amount
D
Merchandise inventory: a. is an asset on the balance sheet b. is the cost of inventory that has not been sold c. is neither A or B d. is both A and B
Notes Receivable
More formal than AR Two parties are the debtor (pays interest expense) and creditor (receives interest revenue) Has a maturity date, maturity value, a principal, term and interest rate generally long term asset but a portion may be current
Perpetual Inventory
Most companies today use this system In this system, units must have a bar code that is scanned every time a unit is sold When sold, the system automatically records the sale and the cost to the computerized accounting system GAAP requires a physical count at year end If the amounts don't match, an adjusting entry is made to reduce inventory and increase COGS
Misappropriation of Assets
Most incidences of fraud Employee steals money and covers up with erroneous entries to the book Employee steals inventory Bribery or kickback schemes Overstatement of reimbursable expenses
Information Systems
Must be able to capture transactions as they occur Access to informations should be granted according to needs
Risk Assessment
Need to identify risk areas Access to assets
Same
Net Accounts Receivable before a write off will be ___ than(as) after write off No change in bet before and after totals
AR Turn Over Ratio
Net Credit sales divided by average net AR Measures how many times a year a company collects its average AR
Net Accounts Receivable
Net Realizable value the allowance account is subtracted from accounts receivable to show the amount that is reasonably expected to be collected
Gross Method for recording early payment discounts
No discount is recorded unless discount is taken
Compliance Monitoring
No one person or department should be able to completely process a transaction from beginning to end Comparing results to budgets Performing audits- both internal and external
To safeguard assets from waste, inefficiency and fraud To encourages employees to follow company policy To promote operational efficiency-minimize waste To comply with legal requirements Ensure accurate, reliable accounting records
Objectives of Internal Control
Ways to speed up cash flow
Offering customers the ability to use credit cards Offering discounts for early payment
Deduct from the bank statement balance
Outstanding checks amount to $3075 as of the end of March
FOB Shipping Point
Ownership transfers when shipped from the sellers dock
FOB Destination
Ownership transfers when the customer receives the goods Can't recognize revenue until it is delivered
Income Statement Approach
Percent of Sales Approach estimates a percentage of uncollectible accounts and records that amount as the uncollectible expense and allowance Ex: Sales are 10 mil and uncollectible accounts are expected to be 1% of sales Uncollectible Accounts Expense D 100,000 Allowance for uncollectible account expense C 100,000 AR 10,000,000 - Allowance 100,000 Net AR 9,900,000
Debit 4500 to Allowance of uncollectible accounts and credit accounts receivable 4500
Prepare the journal entry to write off Mr. Jones' balance account of $4500
Implied Contracts
Purchasing Retail Goods Easily Identifiable Services
Debit 300000 to cash and credit 300000 to accounts receivable
Record the journal entry for the payment of buying widgets on account assuming the discount was not taken
Debit 294000 to cash and 6000 to sales discount, credit accounts receivable 300000
Record the journal entry for the payment of buying widgets on account assuming the discount was taken (paid within 10 days)
Consignment inventory
Represents inventory not owned by the company, but the company has it on hand and has agreed to sell it for a fee Care must be taken to exclude this when physically counting inventory
D
Requiring that an employee with no access to cash do the accounting is an example of which characteristic of internal control: a. Competent and Reliable b. Monitoring of Controls c. Assignment of responsibility d. Separation of duties
Revenue Recognition
Revenue is recognized when earned When entity transfers goods or services in an amount that reflects the cash or fair market value the entity expects to receive in exchange for the goods or services
D
Rudd Co sold a $6100 machine to a customer. The customer signed a 60 day, 4% note. What is the maturity date and maturity value? a. July 3, $6100 b. July 4, $6344 c. July 2, $6060 d. July 3, $6140
Net Method for recording early payment discounts
Sale recorded at discount price Ex: ACE hardware sells construction supplies for 100,000 (cost of 75,000) and offers a 2/10 discount AR D 100,000 Construction Supplies Sale C 100,000 COGS D 75000 Inventory C 75000 Cash D 98000 Sales Discount 2000 AR C 100,000
Gross Profit
Sales - Cost of Goods Sold
Reductions
Sales discounts Sales returns for faulty items other sales allowances
Debit 15,000 to Uncollectible Account Expense and Credit 15,000 to Allowance for Uncollectible Accounts
Sales on account for ABC Corporation totaled 500,000 for the year. ABC estimates that 3% of sales will be uncollectible. Prepare the journal entry to show the expense
Debit 5000 to sales and 2000 to inventory and credit 5000 to sales refund and 2000 to COGS
Sales returns for ABC Corporation were expected to be 1% of sales. Prepare the journal entry to record the expected refund expense. Total on account sales were 500000 Costs are 40% of sales
Fraudulent Financial Reporting
Simply creating false and misleading entries to make the financials look better, in order to deceive investors and/or creditors into investing or loaning money "Cooking the books" Causes the loss of more money
Control Procedures
Smart hiring practices- right person in right job, background checks, proper training Segregation of Duties- asset handling, record keeping, transaction approval Handling assets should be separate from record keeping, all transactions should be approved by a separate unbiased person
B
Smith Co. has shipped goods to a customer FOB Shipping Point. Smith Co will recognize sales revenue when: a. the customer has received the goods b. the goods leave Smith's shipping dock c. the two parties agree that revenue should be recognized d. the customer pays the invoice
Written Contracts
Specific written contracts for one time projects Signed agreements with customers granting a line of credit
Process of Bank Reconciliation
Starts with ending bank statement and ending book balances Deposits recorded by the bank are checked off against book deposits Check amounts recorded by the bank, checked off against book checks EFT and other receipts and disbursements are compared to book
Control Environment
Starts with the tone at the top Top managers should be ethical and set good examples Key ingredient is a company wide code of ethics
Payments by check or EFT
Supporting evidence should be provided to the person authorized to sign checks Paying either by check or EFT requires a three way match process: Purchase of order, proof of receipt, and invoice All three documents must match before a payment is made
C
The Merriweather Co has the following records: Net Sales=88500 Beginning Inventory=10500 Purchases= 28000 Freight-In= 2000 Ending Inventory=12000 What is the COGS for this company? a. 26500 b. 29500 c. 28500 d. 31500
B
The Merriweather Co has the following records: Net Sales=88500 Beginning Inventory=10500 Purchases= 28000 Freight-In= 2000 Ending Inventory=12000 What is the gross profit for this company? a. 62000 b. 60000 c. 50300 d. 52300
Mark Up
The __ from inventory cost represents the sales price
Check Last Months Books
The bank reconciliation for the previous month needs to be looked at to be sure that all previous deposits in transit and outstanding checks now appear
Inventory Costs
The costs of an asset include all costs of bringing an asset to its "intended use" Includes: Freight "in" charge any insurance costs while in transit
Fraud
The intentional misrepresentation of facts designed to persuade another party to act in a way that causes injury or damage to that party Most Common: Misappropriation of Assets and Fraudulent Financial Reporting
D
The perpetual inventory system: a. is used by most businesses b. requires an annual count of inventory on hand c. keeps a continuous record of each inventory item d. all of the above
Cash Receipts by Mail
The person opening the mail gives checks to another person The person that received the checks prepares the deposit slip The checks are given to another person who deposits them A different person records the deposit in the accounting records The bank reconciliation is prepared by another person
Last In First Out
The remaining units, if any, are at the earliest cost If prices are not rising, cost of goods sold will not be more Generally associated with saving income taxes enables a company to keep reported income from dropping lower (assuming rising prices) Results in an old measure of the cost on inventory Matches most current cost of goods sold against sales revenue Enables a company to buy high-cost inventory at year-end and decreases reported income Writes inventory down when its net realizable value drops below its historical cost
Deposits in Transit (+), Outstanding Checks (-) or Bank errors (rare, + or -)
The side of the bank reconciliation includes three reconciling amounts, what are they and how are they treated?
Purchase order, receiving report and invoice
The three requirements before signing checks for purchases
Maker (who signs check), payee (who receives check) and bank (from which check is drawn)
There are three parties to a check, who are they?
Maker, Payee and Bank
Three parties to a check
Debt Ratio
Total liabilities divided by total assets Measures % of assets financed by debt The lower the better with 60-70% average
Early Payment
Typical accounts receivable terms are net 30 days, early payment discounts can speed up cash flow Typical discount is 2/10 or N/30
Debit 5,500 to Uncollectible Account Expense and Credit 5,500 to Allowance for Uncollectible Accounts
Under the balance sheet method of estimating the allowance for uncollectible accounts, the following aging report shows the estimated % of expected uncollectible accounts. The balance in the allowance account is a credit of 1000. Prepare the journal entry to show the uncollectible expense 0-30 days = $200,000 at .5% 31-60 days = $150,000 at 1% 61-90 days = $50000 at 3% Over 90 days = $25000 at 10%
Specific Unit Cost
Unique Items such as piece of art or cars used to account for automobiles, jewelry, and art Writes inventory down when its net realizable value drops below its historical cost
Inventory
Units are purchased from the manufacturer, or distributor, for the purpose of reselling to customers at a higher price Most often purchased on account The amount on the balance sheet represents unsold units All added costs, discounts, returns, allowances are recorded as __
Monitoring of Controls
Using exception reports Identify data not within normal limits
Right person for the right job, good training, background checks, etc.
What are smart hiring practices?
Stolen credit card numbers, malware and phishing expeditions
What are the 3 E commerce pitfalls that information technology needs to prevent?
sCalP Smart hiring practices Compliance/ comparison monitoring Adequate records Limited access Proper approvals
What are the 5 internal control procedures?
Motive, Opportunity and Rationalization
What are the elements of the fraud triangle?
SPEEC-IC Safeguard Assets Promote efficiency Encourage employees to follow policy Ensure accuracy Comply with legal requirements
What are the four objectives of internal control?
Misappropriation of Assets and Fraudulent Financial Statements
What are the most common frauds?
Living beyond means, unusually close with vendors/customers, and financial difficulties
What are the most common red flags?
A receipt should be given to customer Cash drawer only opens when entering a transaction Price always displayed for customer End of day cash counted and checked against tape
What are the requirements for handling point of sale for cash?
Misappropriation of assets and Fraudulent Financial Reporting
What are two most common frauds?
Encryption and Firewalls
What are two ways to prevent e commerce pitfalls?
Early payment discounts and offering credit card options
What are ways to speed up cash flow?
insurance against losses from employee theft
What is a fidelity bond?
Identify performance obligation Determine transaction price Allocation of transaction price to performance obligation Recognize revenue when entity satisfies the performance obligation
What is required if a contract calls for multiple delivery points?
It is recognized when earned
What is the rule for recognizing revenue?
Fraudulent Financial Statements
What type of fraud results in the highest dollar losses?
Writing off an AR
When all efforts to collect are exhausted and it becomes necessary to write off an account, the amount is debited to the allowance account and credited to the AR account
D
When an AR account has been determined to be uncollectible the entry to record the write off using the allowance method includes a: a. debit to AR b. debit to Uncollectible Account Expense c. credit to Notes receivable d. debit to Allowance for Uncollectible Accounts
Accrual
When deposits are made to the bank, and when checks are issued they are recorded on the books at that time, but the bank may not process the transaction until a few days later
Collusion, negligence, or top managers override (lack of ethics)
When does internal control most often fail?
Relieved
When inventory is sold, it is said to be:
Sold
When products are__, the cost of goods sold and the reduction of inventory must also be recorded
It begins with the ending balance from both bank and books
Where does the bank reconciliation begin?
B
Which method of writing off an uncollectible account does NOT violate the expense recognition principle? a. Direct write-off b. allowance method c. net receivables method d. expense recognition does not apply to uncollectible account expense
D
Which of the following assets are not included in "cash equivalents" in a typical balance sheet? a. US government Securities b. Time deposits c. certain very low risk equity securities d. all of the above
D
Why does cash require some specific internal controls? a. Cash is relatively easy to steal b. most transactions ultimately affect cash c. Cash is easy to convert to other forms of wealth
Sales Price
__ should always exceed the cost