ACCT 2110 exam 3

supported by formal written note (legal document) given by borrower to lender - may be current or long-term depending on maturity

notes receivable

Providing physical protection of the company's assets

safeguarding

Blank checks should be stored in a locked location

safeguards over assets and records

given when customer returns good as unsatisfactory but agrees to keep the goods if the seller will make a price allowance

sales allowances

discount offered to customers who pay early

sales discount

merchandise returned by the customer

sales returns

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

sarbanes-oxley act of 2002

requires the principal executive and financial officers to certify that they are responsible for establishing and maintaining the system of internal control over financial reporting

section 302 of sarbanes-oxley act

requires management to produce an internal control report acknowledging that management is responsible for establishing and maintaining an adequate internal control system and procedures for financial reporting and also assessing the effectiveness of these controls

section 404 of sarbanes-oxley act of 2002

Accounting and cash collections should be properly separated

segregation of duties

Action that reduces the likelihood that records could be used to conceal intentional misstatements, theft, or fraud

segregation of duties

focus is on desired ending allowance balance ; on the balance sheet

aging method

bad debt expense is recorded in period of sale ; required by GAAP ; proper matching because estimate of bad debt expense is recorded in period of sale ; proper valuation of AR on the balance sheet because AR is valued at NRV

allowance method (AR)

how is cash reported on the balance sheet?

amount of cash and cash equivalents available on the balance sheet date

Initial entry into the accounting system should be from a consistent source with complete information

adequate documents and records

what does the # of days in receivables ratio express?

the average number of days it takes to collect accounts receivable

maturity is more than one year

non-current receivables

transactions not involving inventory (ex: interest receivable)

non-trade receivables

365/accounts receivable turnover

# of days in receivables

what are the three most important ways to strengthen control over cash?

1. bank reconciliations 2. cash over and short monitoring 3. petty cash management

cash accounts include:

1. cash in bank 2. change funds 3. petty cash

cash management principles entail:

1. delaying payments to suppliers 2. speeding up collection from customers 3. earning the greatest return on any excess cash

what are the three areas in which internal controls assure the company's objectives are being met?

1. effectiveness and efficiency of operations 2. reliability of financial reporting 3. compliance with applicable laws and regulations

a company's control environment includes:

1. philosophy and operating style of management 2. personnel policies and practices of the business 3. overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control

what are the steps of the operating cycle?

1. purchase inventory 2. paying for inventory 3. selling inventory

what does the length of the operating cycle influence?

1. the classification of assets and liabilities on balance sheets 2. amount of capital a business needs 3. the policies that govern its sales of goods and services

the internal control system includes:

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

what does the accounts receivable turnover provide?

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

not supported by formal written note - current asset

accounts receivable

net sales / average net accounts receivable

accounts receivable turnover ratio

Consists of the methods and records used to identify, measure, record, and communicate financial information about a business

accounting system

purpose is to reconcile the bank statement to the accounting records

bank reconciliations

Risks associated with how the company allocates its resources to meet its objectives

business process risks

include all highly liquid investments with an original maturity of three months or less at date of inception and are easily convertible in to known amounts of cash

cash equivalents

cash deposited should equal the total of cash register type; an account used to keep record of the differences between cash and deposits related to sales and register types

cash over and short monitoring

One employee or department should verify the work of another

checks on recorded amounts

Specific approval is given by management for the performance of activities

clearly defined authority and responsibility

Policies and procedures established by top management to help ensure that the company's accounting system and financial statements are as accurate as possible

control activities

The collection of environmental factors that influence the effectiveness of control procedures

control environment

maturity is less than one year

current receivables

bad debt recorded only when account is deemed uncollectible ; not allowed unless difference is immaterial ; poor matching because no estimate of bad debt expense is recorded in period of sale ; poor balancer sheet valuation because AR is valued at gross, not NRV

direct write-off method (AR)

T or F / 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

false

T or F / An accounting system must be computerized in order to ensure the company has proper internal control

false

T or F / An internal control activity that separates responsibilities so that no one person handles all the tasks for a particular activity is referred to as segregation/separation of duties

false

T or F / If a company hires honest employees and its top management acts with integrity, no internal control procedures will be necessary

false

records the sale and associated receivable at the gross amount of the invoice, recognizing the decrease to revenue when the discount is taken

gross method sales discounts

in regards to the accounts receivable turnover ratio, a __________ number is better as it indicates the company is more quickly collecting cash

higher

Collective term for procedures put into place to ensure that employees operate within the scope of their assigned responsibilities and act for the good of the business

internal control system

(chpt. 4) policies and procedures established by top management and the board of directors to provide reasonable assurance that the company's objectives are being met in three areas

internal controls

focus is on bad debt expense ; on the income statement ; most concerned with the matching principle

percentage of credit sales

used to pay for items such as stamps or a cake for an employee birthday party; cash fund used to pay for small amounts that would be impractical to pay with a check

petty cash management

reduction in the selling prices granted by the seller when larger quantities are ordered

quantity discounts

Possible external threats to the organization's success in accomplishing its goals

strategic risks

reduction in the selling price granted by the seller to a particular class of customers (ex: school of accountancy gets 20% at AU bookstore)

trade discounts

owed by customers who purchase inventory (ex: accounts receivable)

trade receivables

T or F / GAAP prefers the net method

true

T or F / GAAP requires that AR be valued and reported at net realizable value on the balance sheet

true

T or F / The stronger the system of internal control, the higher the accuracy of the company's accounting records and financial reports

true

T or F / cash is reported on both the balance sheet and the state of cash flows

true

when does the operating cycle of the business start?

when the business purchases inventory