ACCOUNTING EXAM 3
three areas that ICS ensures are being met
operations reporting compliance
Percentage of Credit Sales Method
primarily concerned with appropriately estimating bad debt expense on the income statement
to encourage prompt payment, businesses may offer a
sales discount
recorded by bank not by business
service charges non sufficient funds checks debit and credit memos
bad debt expense is estimated by determining the ending balance desired in the allowance for doubtful accounts
aging method
which method of bad debt expense is GAAP approved
allowance method
an account established to store the estimate of uncollectible accounts
allowance of doubtful accounts
cash over and short should be treated as an —— account and is reported as a part of ——
income statement expenses and other revenues
accounts receivable turnover
net sales/average net accounts receivable
the first stage of the operating cycle is paying for inventory
false
when cash is received a cash account is increased by a credit (t/f)
false
information and communication
An effective internal control system generates and communicates information about activities affecting the organization to support sound decision making.
T/F Accounts Receivable requires a formal written document
False
net relizable value
The amount of accounts receivable a business expects to collect.
Monitoring Activities
The process of tracking potential and actual problems in the internal controls system
pretty cash
an amount of cash kept on hand and used for making small payments
the expense that results from receivables that are not paid
bad debt expense
aging method
bad debt expense is estimated by determining the collectability of the accounts receivable rather than by taking a percentage of total credit sales
where is cash reported
balance sheet and statement of cash flows
to ensure that the accounting records are consistent with the banks accounting records, any differences must be reconciled. this is called
bank reconciliation
which shows the beginning and ending account balance, individual deposits and withdrawals recorded by the bank
bank statement
stages of the operating cycle
buying inventory paying for the inventory selling inventory
when a specific account is ultimately determined to be uncollectible under the allowance method, it is written off _____
by a debit to the allowance account and a credit to the accounts receivable
what is not a component of the internal controls system
cash assessment
records discrepancies between deposited amounts of actual cash received and the total of the cash register tape
cash over and short
what is not one of the areas for which ICS are intended to provide reasonable assurance
certification that the financial statements are without error
cash includes not only currency and coins but also —-
checks and money orders
operating cycle influences
classifications of assets and liabilities on balance sheets//amount of capital a business needs and the policies that govern its sales of goods and services
the five control activities
clearly defined authority and responsibility segregation of duties adequate documents and records safeguards over assets and records checks on recorded amounts
the accounting system
consists of methods and records used to identity measure record and communicate financial information about a business
the politics and procedures top management establishes to help ensure that it's objectives are met
control activities
the collection of environmental factors that influence the effectiveness of control procedures
control environment
the foundation of the internal control system is the
control environment
five components of ICS
control environment control activities information and communication monitoring activities
bad debt expense method that waits until an account is deemed uncollectible before reducing AR and recording the bad debt
direct write off method
what is the primary role of internal controls in managing a business
ensure financial statements present relevant and reliable information
for customers not expected to pay in the discount period, sales revenue should be recorded at the net amount
false
when a customer is not expected to pay within the discount period
gross method
gross profit margin =
gross profit/net sales
which of the following is not an objective of internal controls
management objectives
the internal audit function is part of what element of the internal control system?
monitoring
the process of tracking potential and actual problems in the internal
monitoring
When a customer is expected to pay within the discount period a company should use the
net method
a check issued and recorded by the business that has not been cashed
outstanding checks
recorded by business but not by bank
outstanding checks deposits in transit
when are adjustments necessary in a bank reconciliation?
outstanding checks or deposits in transit NO company errors or items such as bank charges or interest YES
what does the notation 2/10 n/30 mean
payment due in 30 days 2% discount if payment is made within 10 days
a fund used to pay for small dollar amounts
petty cash
strategic risks
possible threats to the organization's success in accomplishing its objectives that are external to the organizations success in accomplishing its objectives and are external to the organization//often classified around industry forces
a reduction in the selling price granted by the seller to a particular class
quantity and trade discount
reduction in selling price granted by seller because selling costs per unit are less when larger quantities are ordered
quantity discount
business process risks
the internal processes of the company specially how the company allocated its resources to meet its objectives
control environment includes the following
the philosophy and operating style of management the personnel policies and practices of the business overall integrity attitude and awareness of actions of everyone in the business concerning the importance of control
estimated bad debt expense
total credit sales x percentage of credit sales estimated to default
percentage of credit sales method
total credit sales x percentage of credit sales estimated to default = estimated bad debt expense
differences between cash account balance and the bank statement balance develop from
transactions recorded by the business but not recorded by the bank in time recorded by bank but not by business errors in recording transactions on either set of records
a cash shortage requires a debit to cash over and short
true
a checking account is a liability for the bank
true
an ics will be unable to help a company achieve its objective unless adequate information is identified and gathered
true
cash includes not only currency and coins but also savings and checking accounts and negotiable instruments
true
for customers expected to take the discount, sales revenue should be recorded at the net amount
true
in the allowance method, bad debt expense is recognized in the period of sale
true
the direct mail rite off method is inconsistent with the GAAP
true
