ACCT 3110 Exam 3

COSO defines internal control as a process, affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in:

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

2/10, n/30 (sales discount)

2% discount if paid within 10 days, otherwise net amount due within 30 days

allowance method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

trade receivables

Accounts receivable and notes receivable that result from sales transactions for a company's goods or services. Trade receivables are usually the most significant type of receivable a company possesses.

Short-Term Noninterest-Bearing Notes

Actually do bear interest, but the interest is deducted from the face value to determine the cash proceeds made available to the borrower at the offset.

nontrade receivables

Claims that arise from a variety of nonsales transactions. Examples include advances to officers and employees or to subsidiaries; dividends and interest receivable; deposits paid to cover potential damages or losses or as a guarantee of performance or payment; and claims against insurance companies for casualties sustained, defendants under suit, governmental bodies for tax refunds, common carriers for damaged or lost goods, creditors for returned, damaged, or lost goods, and customers for returnable items.

Committee of Sponsoring Organizations (COSO)

Committee of Sponsoring Organizations of the Treadway Commission (or COSO) is a joint initiative of five private sector organizations and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.

Separation of Duties

Dividing responsibilities between two or more people to limit fraud and promote accuracy of accounting records.

why is cash an unearning asset?

If you have too much on hand then you forfeit money through lost returns. However, having too little on hand increases risk.

troubled debt restructuring

Occurs when a creditor grants to the debtor, due to the debtor's financial difficulties, concessions that it would not otherwise consider. A troubled-debt restructuring involves either (1) settlement of debt at less than its carrying amount, or (2) continuation of debt with a modification of terms.

Gross Method of Cash Discounts

Purchase date: record revenue and related receivable at cost - If payment made within the discount period, dr. "sales discount" to reduce revenue - If payment made after discount period, record collection of cash as usual.

Net Method of Cash Discounts

Purchase date: record revenue and related receivable at the agreed upon price less the discount offered - If payment made within discount period, dr. cash and cr. accounts receivable for the amounts received - If payment made outside of the discount period, cr. "sales discount forfeited" for amount of discount not taken to increase revenue.

sales without recourse

Purchaser assumes risk of collection

Discount on Notes Receivable

The Discount on Notes Receivable is a valuation account. Companies report it on the balance sheet as a contra-asset account to notes receivable. They then amortize the discount, and recognize interest revenue annually using the effective-interest method.

secured borrowing

The borrower acts like it borrowed money from the lender, with receivables remaining in the borrower's balance sheet and serving as collateral for the loan. The lender recognizes a note receivable.

effective interest method

The preferred procedure for computing the amortization of a discount or premium. Under this method, companies compute bond interest expense (revenue) at the beginning of the period by the effective-interest rate and then subtract bond interest paid (calculated as the face amount of the bonds times the stated interest rate); the result is the amortization amount.

current expected credit loss (CECL) model

a model used to estimate credit losses (bad debts) for receivables and for debt investments that are accounted for as held to maturity or available for sale

pledge

a promise to relinquish control of an asset in payment of an amount due

FASB sales approach restrictions. A transferor has surrendered control only if ALL of these condition are met...

a. transferred assets have been isolated from the transferor (and its creditors) b. each transferee has the right to pledge or assign the asset it received c. transferor does not maintain effective control over the transferred assets

Internal controls on cash disbursements

all disbursements, except small ones for petty cash, should be made by check (to provide a permanent record), authorized before a check is prepared, and signed only by authorized individuals.

cash disbursements

all outlays of cash by the firm during a given financial period

restricted cash

cash that is not available for general use but instead is restricted for a particular purpose. Typically a noncurrent asset in "investments" or "other assets", but classification relies on the nature of the corresponding liability.

Accounting for actual sales returns

dr. sales returns cr. cash or account receivable dr. Inventory cr. Cost of goods sold

Accounting for estimated sales returns

dr. sales returns cr. refund liability dr. inventory- estimated returns cr. cost of goods sold

reverse write off

if new information indicates that a previously written-off receivable might be collected: dr. accounts receivable cr. allowance for uncollectible accounts

Why is the direct write off method not acceptable by GAAP?

it fails to anticipate uncollectible accounts receivables, so overstates balance in prior periods. It also distorts net income by postponing recognition of bad debt expense.

sales (cash) discount

percentage reduction of the invoice price if the customer pays the invoice within a specified period. Used to encourage timely collection of receivables. Variable consideration.

Internal Control System

policies and procedures necessary to ensure the safeguarding of an entity's assets, the reliability of its accounting records, and the accomplishment of overall company objectives

direct write-off method

recording uncollectible accounts expense only when an amount is actually known to be uncollectible. dr. bad debt expense cr. accounts receivable

trade discount

reduction in the listed price (normally a %) of a product or service. NOT variable consideration because it involves a predetermined amount.

Sales Returns variable consideration procedure

sellers should reduce revenue for estimated future sales returns by debiting "sales returns" (contra revenue) and report net sales revenue on income statement.

compensating balance

the portion of an unsecured loan that is kept on deposit at a lending institution to protect the lender and increase the lender's return

factoring

the process of selling accounts receivable to a financial institution for cash

Securitization

the process of transforming loans or other financial assets into securities. company creates a special purpose entity (SPE) that buys a pool of trade receivables, credit card receivables, or loans from the company and sells related securities that are collateralized by the receivables.

sales with recourse

the seller guarantees payment to the purchaser in the event the debtor fails to pay

discounting

the transfer of a note receivable to a financial institution.

Sales of Receivables

transferor derecognizes the receivables from its balance sheet, acting like they sold it to the transferee

assign (receivables)

using receivables as collateral for loans