ACCT 2110 Exam 2

What is meant by ''tone at the top''? Why is it so important to an effective system of internal controls?

"Tone at the top" is the notion of leading by example. The idea is that top management first sets a good example and the rest of the organization will then follow management's behaviors. If top management effectively communicates controls to subordinates, the rest of the organization is more likely to execute proper internal control policies and procedures.

What kinds of bank reconciliation items require the firm to make adjusting entries?

(1) An NSF check is a check written against an account that does not have sufficient funds. Such a check is initially recorded as a cash receipt but is subsequently deducted from cash and recorded as a receivable until collected or written off. (2) Bank service charges are fees charged by banks for their services. Service charges are generally based on the number of transactions processed by the bank and are deducted from the account by the bank. The company usually does not know the precise amount of the charges until the bank statement is received. 3)A debit memo is a document prepared by the bank and describes reductions in the checking account for items other than those associated with checks and service charges. (4) A credit memo is a document prepared by the bank and describes increases in the checking account balance for items other than those associated with deposits.

Describe the effect on the financial statements when an adjustment is prepared that records (a) unrecorded revenue and (b) unrecorded expense.

(a) An adjustment to record an unrecorded revenue (an accrued revenue) will increase revenues and assets. The revenue increase will increase net income, which will increase stockholders' equity by increasing retained earnings. (b) An adjusting entry to record unrecorded expense (an accrued expense) will increase expenses and liabilities. The expense increase will decrease net income, which will decrease equity by decreasing retained earnings.

Explain the difference between cash-basis and accrual-basis accounting.

-Cash-basis and accrual-basis accounting are two alternatives for recording business activities in the accounting records. -Under cash-basis accounting, revenues and expenses are recorded when cash is received or paid, regardless of when the revenues are earned or the expenses are incurred. -Accrual-basis accounting links income measurement to the selling activities of a company by recognizing revenues and expenses when they occur.

identify each of the following categories of accounts as temporary or permanent: assets, liabilities, equity, revenues, expenses, and dividends declared. How is the distinction between temporary and permanent accounts related to the closing process?

-Expense, revenue, and dividend accounts are temporary accounts. -Asset, liability, and stockholders' equity accounts are permanent accounts. Temporary accounts are closed to Retained Earnings. -Permanent accounts are not closed to Retained Earnings but appear on the balance sheet and are carried forward as beginning balances for the next period.

adjusting entries

-apply revenue and expense recognition principles to ensure that a company's financial statements reflect the proper amount for revenues, expenses, assets, liabilities, and SE -journal entries that are made at the end of an accounting period to record the completed portion of partially completed transactions

adjusted trial balance

-updated trial balance that reflects the changes to account balances as the result of adjusting entries -lists all of the active accounts and updates the trial balance to reflect the adjusting entries that have been made -primary source of information needed to prepare the financial statements

How do these control activities help protect a company against error, theft, and fraud?

1)By clearly defining authority and responsibility for important duties, management makes it unlikely that an employee can take on a collection of responsibilities that make it possible to misappropriate assets or misstate account balances without detection. It also motivates individuals to perform well and facilitates corrective action if someone fails to perform satisfactorily. (2) Segregating duties—particularly segregating record keeping from operating and other administrative duties—makes it difficult for a single employee to misappropriate assets and to conceal the misappropriation by altering records. Intentional misstatements of account balances are similarly made more difficult to conceal. It also reduces the likelihood of unintentional record-keeping errors remaining undiscovered. (3) Adequate documents and records facilitate the evaluation and monitoring ofperformance by persons both inside and outside the entity.(4) Safeguards over assets and records discourage theft, misuse, and misappropriation of assets as well as tampering with records intended to conceal such theft, misuse, or misappropriation. (5) Checks on recorded amounts by independent parties discourage misappropriation, theft, and misuse of assets and can lead to the discovery of such failures of the control system.

steps in accounting cycle

1. Analyze business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance

Describe the potential sources of difference between a cash account and its associated bank statement balance.

A cash account may differ from its associated bank account because of (1) transactions recorded by the business but not recorded by the bank in time to appear on the current bank statement (deposits in transit and outstanding checks), (2) transactions recorded by the bank but not yet recorded by the business (debit memos, credit memos, NSF checks, and service charges), and (3) errors in recording transactions on either set of records.

What accounting concepts require that adjusting entries be employed?

Accrual accounting, the time period assumption, the revenue recognition principle, and the expense recognition principle require a company to make adjusting entries. Accrual accounting requires that business activities be recorded when they occur. The revenue recognition principle requires that revenues be recognized when a company satisfies its performance obligations by delivering goods or performing services. The expense recognition principle requires that expenses be recognized in the same period as the revenue that it helped to generate. The time period assumption allows companies to artificially divide their operations into time periods so that it is possible to prepare meaningful financial statements (financial statements that have correct revenues, expenses, assets, and liabilities) that satisfy users' demands for information.

How does accrual-basis net income differ from cash-basis net income

Accrual-basis accounting recognizes revenue when the company satisfies its performance obligations by delivering goods or providing services. Expenses are recognized when they are incurred. In other words, revenues and expenses are recognized when they occur rather than when cash is received (from sales) or paid (for expenses). Cash-basis accounting recognizes revenues when cash is received, regardless of when the goods are delivered or services are provided. Similarly, cash-basis accounting records expenses when cash is paid, regardless of when they are actually incurred. Accrual accounting links income measurement to selling, the principle activity of the company, while cash-basis accounting links recognition of revenues and expenses to the exchange of cash.

What is the difference between an accrual and a deferral?

Accruals and deferrals are necessary because timing differences exist between when a revenue or an expense is recognized and cash is received or paid. An accrual is an entry that recognizes revenue or expense (and the effect on the balance sheet accounts) before the related cash is received or paid. That is, the cash payment comes after the recognition of the revenue or expense. A deferral is an entry that records a liability or an asset associated with an initial cash receipt or payment. A liability or an asset is recorded because the cash payment has occurred before the related revenue or expense is recognized. Deferrals lead to subsequent adjusting entries that reduce the liability or asset and increase and recognize revenue or expense.

For each of the four categories of adjusting entries, describe the business activity that produces circumstances requiring adjustment.

Accrued revenue: At year end, a continuous revenue transaction (e.g., service or rent) is partially complete. The customer has not yet paid. Revenue for the portion of the transaction that has been completed (earned) but for which no cash has yet been received must be recorded by making an adjusting entry that increases assets and revenues. Accrued expense: At year end, a continuous expense transaction is partially complete. The company has not yet paid the expense. An expense for the portion of the transaction that has been incurred but for which cash has not yet been paid must be recorded by making an adjusting entry that increases liabilities and expenses. Deferred revenue: At some point before year end, a customer paid in advance for goods or services that will be provided in a continuous transaction. At year end, some but not all of the goods or services have been provided; therefore, some, but not all of the revenue has been earned. An adjusting entry is necessary to recognize the portion of the revenue for which the company's performance obligation has been satisfied (the portion of the revenue that has been earned). Deferred expense: At some point before year end, the business paid in advance for an asset that will be used in a continuous transaction. At year end, some but not all of the asset has been used. An adjusting entry is necessary to recognize as an expense the portion of the asset that has been used.

Which type of adjustment will (a) increase both assets and revenues, (b) increase revenues and decrease liabilities, (c) increase expenses and decrease assets, and (d) increase both expenses and liabilities?

Accrued revenue—Assets and revenues are increased when an adjusting entry recognizes revenue before cash is received. (b) Deferred revenue—When prepayments are received from customers before a company satisfies its performance obligation (e.g., before the revenue is earned), firms normally increase a liability account (unearned revenue). When an adjustment is made to record the portion of the prepayment that has been earned, the entry will increase a revenue account and decrease the liability. (c) Deferred expense—When prepayments are made for expense items, a firm normally increases an asset account. When an adjustment is made to record the portion of the prepayment (asset) that has been transferred to customers or used in operations, the entry will increase an expense account and decrease the asset. (d) Accrued expense—Expenses and liabilities are increased when an adjustment records an expense recognized before the cash payment is made.

Why are adjusting entries needed?

Adjusting entries are journal entries made at the end of an accounting period to record the completed portion of partially completed transactions. They are necessary to apply the revenue recognition and expense recognition principles and ensure that a company's financial statements include the proper amount for revenues, expenses, assets, liabilities, and stockholders' equity. All adjusting entries will affect at least one income statement account and one balance sheet account. Therefore, if adjusting entries were not made, both the income statement and the balance sheet will be incorrect at year end.

On the basis of what you have learned about adjustments, why do you think that adjusting entries are made on the last day of the accounting period rather than at several times during the accounting period?

Adjustments require estimates and other information about partially completed continuous events that are frequently costly and troublesome to obtain. Because correct account balances are usually required only when financial statements are prepared and because financial statements are prepared only at the end of the accounting period, adjustments during the accounting period are unnecessary. Most of our examples involve annual accounting periods. Of course, if a company prepares monthly financial statements (as many do), then adjustments must be made at the end of every month.

What is the relationship between the accounting cycle and the worksheet?

Although the worksheet is an optional step in the accounting cycle, it is a useful "scratch pad" tool in the performance of the end-of-period portion of the accounting cycle—namely, the preparation of the adjusting entries, the financial statements, and the closing entries. The worksheet summarizes the information generated in the performance of these accounting cycle steps and enables the accountant to check this information for completeness and consistency.

What are business process risks?

Business process risks are the risks associated with the internal processes of the company—specifically, the risks associated with how the company allocates its resources to meet its objectives. Business process risks are commonly associated with internal processes, such as materials acquisition, production, logistics and distribution, branding and marketing, and human resources. The nature and relative importance of the business processes will vary from company to company based on their specific objectives.

Why is it important to segregate the duties for handling cash from the duties for keeping the accounting records for cash?

By segregating the duties of handling cash and maintaining accounting records, the risk of theft in this process is reduced. Those who handle the cash can no longer steal the money and record a fictitious amount in the accounting system to cover up the theft.

What are cash equivalents?

Cash equivalents are assets held by a company that are (1) easily convertible into known amounts of cash and (2) close enough to maturity that they are relatively insensitive to changes in interest rates.

Describe the basic cash management principles.

Cash management principles entail delaying payment to suppliers (unless a discount is offered for quick payment), so a company can earn as much interest on its cash as possible, speeding up collection from customers in order to invest the cash sooner, and earning the greatest return on any excess cash.

Why does a company give particular attention to internal controls for cash?

Cash requires a more detailed system of internal controls because cash is easier to misappropriate than most other assets and is frequently the asset most sought after by those who would misappropriate.

Why do most companies have petty cash funds?

Checks are costly to use. They cost money to print, mail, and process. Thus, issuing checks to pay for small dollar items usually proves more costly than beneficial. To reduce such costs, a company may establish a petty cash fund to pay for small dollar amount items.

Why do companies invest their cash in short-term investments?

Companies invest their cash in short-term investments because these short-term investments earn a greater rate of return than cash sitting in a bank account. Yet, short-term investments are highly liquid, which allows them to be easily turned into cash as needed.

How do control activities relate to the accounting system?

Control activities play a crucial role in the accounting system by helping to prevent errors and reduce the risk of asset misappropriation. For example, fraud and employee error can be reduced by restricting access to the accounting system to only certain qualified individuals. Asset misappropriation can also be reduced to a level below materiality by conducting annual independent audits (a check on recorded amounts).

What happens during the accounting cycle?

During the accounting cycle, information is collected about business activities. This information is analyzed to determine which activities meet the criteria for recognition in the accounting records and their effect on the fundamental accounting equation. The transactions that meet these criteria are entered in the journal on an event-by-event basis. The journal entries are then posted to the ledger, which is organized on an account-by-account basis. At the end of the accounting period, a trial balance is typically prepared. Adjusting entries are then prepared for those transactions that are partially complete (still under way) at the end of the accounting period. The adjusting entries recognize the portion of the transaction that has been completed. Next, the financial statements are prepared. Finally, the temporary accounts—revenues, expenses, and dividends—are closed, and their balances are transferred to Retained Earnings.

closing entries

Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account -clear the balances in revenues, expenses, gains, losses, and dividends declared (reduce their balances to zero) so that they are ready to accumulate the business activities of the next accounting period.

How is the amount for an interest expense (or interest revenue) adjustment determined?

Interest = Principal x Interest Rate x Time -Principal is the amount borrowed or loaned -Interest rate is the annual interest rate -Time is the fraction of the year for which the receivable or payable is outstanding.

Internal control systems include policies and procedures to do what?

Internal control systems include all 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: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.

Why do companies hold short-term investments?

Many companies hold short-term investments as part of a program of liquidity management. Such investments provide a return on funds that are available for short periods of time without impeding access to the invested funds. Some businesses, particularly financial institutions, buy and sell short-term investments in order to profit from day-to-day changes in the prices of such investments.

Time Period Assumption

Presumes that the life of a company can be divided into time periods, such as months and years.

Provide two examples of transactions that begin and end at a particular point in time and two examples of continuous transactions.

Sale of merchandise Collection of an account receivable Purchase of goods Payment of an account payable Receipt of borrowed cash Issuance of common stock for cash Payment of a cash dividend ---------------- Use of borrowed money (accrual of interest) Use of rented buildings or equipment (rent expense) Use of owned buildings or equipment (depreciation expense) Expiration of insurance coverage (insurance expense)

The Sarbanes-Oxley Act increased top management's responsibility for what?

Section 404 of the Sarbanes-Oxley Act increased top management's responsibility by requiring management to produce an internal control report. This report must acknowledge that management is responsible for establishing and maintaining an adequate internal control system and procedures for financial reporting. Management is also responsible for assessing the effectiveness of these controls.

What are strategic risks?

Strategic risks are possible threats to the organization's success in accomplishing its objectives. These risks are external and are often classified around industry forces or macro factors. Industry forces that imply strategic risks include competitors, customers, substitute products or services, suppliers, and the threat of new competitors. Macro factors include political, economic, social, and technological environments.

Describe how cash over and short can be used for internal control purposes.

The cash over and short account is used to record discrepancies between the amount of cash in the register and the amount of cash that was recorded on the register tape. Noting differences between the amount of cash in the register and the corresponding register tape can discourage theft and carelessness and is thus a form of internal control.

Describe two advantages of performing reconciliations of the cash account to the balances on the bank statements.

The first advantage in reconciling the cash account to the bank statement is that it serves as a control function by identifying errors and providing an inspection of detailed records that deters theft. Second, reconciliations serve as a transaction detection function by identifying transactions performed by the bank, so the business can make the necessary entries in its records.

What are the five categories of control activities?

The five categories of control activities are (1) clearly defined authority and responsibility, (2) segregation of duties, (3) adequate documents and records, (4) safeguards over assets and records, and (5) checks on recorded amounts by independent parties.

What are the five components of internal control?

The five components of internal control are (1) the control environment, (2) risk assessment, (3) control activities, (4) communication and information, and (5) monitoring.

Why are only the balance sheet accounts permanent?

The income statement accounts and dividends recognize the effects of one period's business activities. Income statement and dividend accounts must be temporary so that we can identify the revenue, expense, and dividends amounts for each individual period. The balance sheet accounts are permanent and recognize the activities of every period. Balance sheet accounts must be permanent, so they can carry forward the effects of prior periods.

What is the purpose of an internal control system?

The purpose of an internal control system is to provide reasonable assurance that the company's objectives are being met in three areas: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.

What is the purpose of closing entries?

The purpose of the closing entries is to transfer the balances in the revenue, expense, and dividend accounts (the temporary accounts) to retained earnings (a permanent stockholders' equity account) and to clear the revenues, expenses, and dividends (reduce their balances to zero) so they are ready to accumulate the business activities of the next accounting period. Without closing entries, these temporary accounts would accumulate the business activities of all accounting periods not just the current period, and some balance sheet (permanent) accounts would reflect incorrect account balances.

Describe the structure of the worksheet and the accounting information it contains.

The worksheet consists of one pair of debit and credit columns for each of the following sets of information: (1) unadjusted trial balances(2) adjusting entries(3) adjusted trial balances(4) income statement(5) retained earnings statement(6) balance sheet -In addition, the worksheet provides subtotals that facilitate the calculation of income taxes expense and the preparation of closing entries.

Describe the recording of transactions that begin and end at a particular point in time and the recording of continuous transactions.

Transactions that begin and end at a point in time are recorded individually as they occur or by summary entries at regular intervals. Continuous transactions are recorded at their completion, or, if the accounting period ends before completion, an adjusting entry may record the completed portion. Like point-in-time transactions, continuous transactions may be recorded individually or by summary entries. Further, adjusting entries may summarize the completed portions of a number of continuous transactions.

Explain when revenue may be recognized and give an example.

Under the revenue recognition principle, revenue is recognized, or recorded, in the period in which a company satisfies its performance obligation or promise within a contract. A seller satisfies a performance obligation by transferring control of a promised good or service to a customer. Control can be transferred either at a point in time or over time.

Deposits made by a company but not yet reflected in a bank statement are called a)deposits in transit. b)debit memoranda. c)credit memoranda. d)None of the above.

a

Which of the following is not one of the five components of internal control? a)Analysis of control procedures b)Information and communication c)Risk assessment d)Control environment

a

Which of the following statements is incorrect regarding preparing financial statements? a)The adjusted trial balance lists only the balance sheet accounts in a ''debit'' and ''credit'' format. b)The adjusted trial balance is the primary source of information needed to prepare the financial statements. c)The financial statements are prepared in the following order: (1) the income statement, (2) the retained earnings statement, and (3) the balance sheet. d)The income statement and the balance sheet are related through the retained earnings account.

a

Which one of the following is not a cash equivalent? a)180-day note issued by a local or state government b)90-day U.S. Treasury bill c)60-day corporate commercial paper d)30-day certificate of deposit

a

Which one of the following statements is true? a)Sound internal control practice dictates that cash disbursements should be made by check, unless the disbursement is very small. b)Petty cash can be substituted for a checking account to expedite the payment of all disbursements. c)Good cash management practices dictate that a company should maintain as large a balance as possible in its cash account. d)The person handling the cash should also prepare the bank reconciliation.

a

non-sufficient funds check (NSF)

a check that has been returned to the depositor because funds in the issuer's account are not sufficient to pay the check (also called a "bounced" check).

petty cash

a fund used to pay for small dollar amounts.

permanent accounts

accounts of asset, liability, and stockholders' equity items whose balances are carried forward from the current accounting period to future accounting periods.

cash over and short

an account that records the discrepancies between deposited amounts of actual cash received and the total of the cash register tape.

Allowing only certain employees to order goods and services for the company is an example of what internal control procedure? a)Adequate documents and records b)Clearly defined authority and responsibility c)Safeguarding of assets and records d)Checks on recorded amount

b

Cash management principles do not include a)earning the greatest return possible on excess cash. b)paying suppliers promptly. c)speeding up collection from customers. d)delaying payment of suppliers.

b

Reinhardt Company reported revenues of $122,000 and expenses of $83,000 on its income statement. In addition, Reinhardt declared and paid $4,000 of dividends during the year. On December 31, Reinhardt prepared closing entries. The net effect of the closing entries on retained earnings was a(n): a)decrease of $4,000. b)increase of $35,000. c)increase of $39,000. d)decrease of $87,000.

b

The internal audit function is part of what element of the internal control system? a)Control environment b)Monitoring c)Risk assessment d)Control activities

b

Which of the following is not one of the five categories of control activities? a)Checks on recorded amounts b)Defalcation and financial reporting c)Clearly defined authority and responsibility d)Segregation of duties

b

Which of the following statements is true? a)Under cash-basis accounting, revenues are recorded when a company satisfies its performance obligations and expenses are recorded when incurred. b)Accrual-basis accounting records both cash and noncash transactions when they occur. c)Generally accepted accounting principles require companies to use cash-basis accounting. d)The key elements of accrual-basis accounting are the revenue recognition principle, the expense recognition principle, and the historical cost principle.

b

In September, GolfWorld Magazine obtained $15,000 of subscriptions for 1 year of magazines and credited Unearned Sales Revenue. Delivery of the magazines will begin in October. At December 31, GolfWorld should make the following adjustment: a)Debit Sales Revenue by $3,750 and credit Unearned Sales Revenue by $3,750. b)Debit Unearned Sales Revenue by $3,750 and credit Sales Revenue by $3,750. c)Debit Sales Revenue by $11,250 and credit Unearned Sales Revenue by $11,250. d)Debit Unearned Sales Revenue by $11,250 and credit Sales Revenue by $11,250.

b (15000/ 12 months)= 1250 per month x 3 months

Dallas Company loaned $10,000 to Ewing Company on December 1. Ewing will pay Dallas $720 of interest ($60 per month) in 1 year. Dallas's adjusting entry at December 31 is: a) interest expense....60 cash.......60 b)cash........60 interest income....60 c)interest receivable......60 interest income........60 d) no adjusting entry is required

c

Effective cash management and control includes all of the following except a)the use of a petty cash fund. b)bank reconciliations. c)purchase of stocks and bonds. d)short-term investments of excess cash.

c

In December, Swanstrom Inc. receives a cash payment of $3,500 for services performed during December and a cash payment of $4,500 for services to be performed during the next month. Swanstrom also receives the December utility bill for $600 but does not pay this bill until January. For December, under the accrual basis of accounting, Swanstrom would recognize: a)$8,000 of revenue and $600 of expense. b)$8,000 of revenue and $0 of expense. c)$3,500 of revenue and $600 of expense. d)$3,500 of revenue and $0 of expense.

c

What is the primary role of internal controls in managing a business? a)To prevent cash from being stolen b)To ensure that the financial statements are presented in such a manner as to provide relevant and reliable information for financial statement users and the company's creditors c)To constrain subordinates' activities in order to prevent employees from deviating from the scope of their responsibilities and encouraging them to act in the best interest of the business d)To encourage theft and to ensure that segregation of duties does not take place

c

Which of the following is not generally an internal control activity? a)Establishing clear lines of authority to carry out specific tasks b)Physically counting inventory in a perpetual inventory system c)Reducing the cost of hiring seasonal employees d)Limiting access to computerized accounting records

c

Which of the following is true regarding the accounting cycle? a)The accounts are adjusted after preparing the financial statements. b)Journal entries are made prior to the transaction being analyzed. c)The temporary accounts are closed after the financial statements are prepared. d)An adjusted trial balance is usually prepared after the accounts are closed.

c

Which of the following statements is false? a)Adjusting entries are necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid. b)Adjusting entries always affect at least one revenue or expense account and one asset or liability account. c)The cash account will always be affected by adjusting journal entries. d)Adjusting entries can be classified as either accruals or deferrals.

c

Hurd Inc. prepays rent every 3 months on March 1, June 1, September 1, and December 1. Rent for the 3 months totals $3,600. On December 31, Hurd will report Prepaid Rent of: a)$0. b)$1,200. c)$2,400. d)$3,600.

c (3600/3 months)=1200 per month x 2 months that remain prepaid

deferrals

cash received or paid before revenues have been earned or expenses have been incurred

five components of internal control

control environment, risk assessment, control activities, information and communication, monitoring

High level cash management strategies include a)bank reconciliations. b)cash over and short. c)petty cash. d)delaying payment for suppliers.

d

The operating cycle is best described as the time between a)production and sale of inventory. b)the sale of inventory and collection of receivables. c)the formation of the company and the start of operations. d)purchase of goods for resale and collection of cash from customers.

d

Which of the following is not one of the three areas for which internal control systems are intended to provide reasonable assurance? a)Reliability of financial reporting b)Compliance with applicable laws and regulations c)Effectiveness and efficiency of operations d)Certification that the financial statements are without error

d

Which one of the following would not appear on a bank statement for a checking account? a)Deposits b)Interest earned c)Service charges d)Outstanding checks

d

Which transaction would require adjustment at December 31? a)The sale of merchandise for cash on December 30. b)Common stock was issued on November 30. c)Salaries were paid to employees on December 31 for work performed in December. d)A 1-year insurance policy (which took effect immediately) was purchased on December 1.

d

Ron's Diner received the following bills for April utilities: -Electricity: $625 received on April 29 -Telephone: $150 received on May 5 Both bills were paid in May 10. On the April balance sheet, Ron's Diner will report accrued expenses of: a)$0. b)$150. c)$625. d)$775.

d (625+150)

service charges

fees charged by the bank for services provided. Examples include annual maintenance, minimum balance, and foreign transaction fees.

cash basis accounting

method of accounting in which revenue (income) is recorded when cash is received, regardless of when it is actually earned -expense is recorded when cash is paid, regardless of when it is actually incurred - does not tie recognition of revenues and expenses to the actual business activity but rather to the exchange of cash

deferred expenses

previously recorded assets, such as prepaid rent, supplies, and equipment, that were created when cash was paid in advance and that must be reduced for the amount of expense actually incurred during the period through use of the asset

accrued revenues

previously unrecorded revenues that have been earned but for which no cash has yet been received

Revenue Recognition Principle

revenue is recognized or recorded in the period in which a company satisfies its performance obligation, or promise within a contract. -A seller satisfies a performance obligation by transferring control of a promised good or service to a customer. -Control can be transferred from the seller to the buyer either at a point in time or over time.

accruals

revenues earned or expenses incurred before cash has been exchanged (received or paid)

deferred revenues

revenues that have been collected but not earned; they are liabilities until the goods or services have been provided

internal control system

the 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: (1) effectiveness and efficiency of operations, (2) reliability of financial reporting, and (3) compliance with applicable laws and regulations.

bank reconciliation

the process of reconciling any differences between a company's accounting records and the bank's accounting records.

Accrual Basis Accounting

•Revenues are recorded when earned (rather than when cash is received) •Expenses are matched to the periods in which they help produce revenues (rather than when cash is paid)

What is the operating cycle?

The operating cycle is the elapsed time between the purchase of goods for resale (or the purchase of materials to produce salable goods or services) and the collection of cash from customers (presumably a larger amount of cash than was invested in the goods sold).

describe how businesses account for and report cash

-A cash account is debited when cash is received and credited when cash is paid out. -Cash is reported on the balance sheet as the amount of cash and cash equivalents available on the balance sheet date. -The statement of cash flows shows the sources and uses of cash during the accounting period. -Cash equivalents are amounts that are easily convertible in to known amounts of cash and investments that are close to maturity.

List the seven steps in the accounting cycle in the order in which they occur and explain what occurs at each step of the accounting cycle.

Step 1: Analyze transactions—Determine which business activities will be recognized in the accounting records and the accounts they affect. Step 2:Journalize transactions—Show which accounts are affected and by what dollar amount by putting the data collected above into a journal entry. Step 3:Post to the ledger—Summarize all journal entries into one place (ledger). Step 4:Prepare a trial balance—Prepare a listing of all accounts that have balances and have been used in the journalizing process and show current account balances. Confirm that total debits equal total credits. Step 5:Adjust the accounts—Make adjusting entries to properly reflect income for the period. Step 6:Prepare financial statements—Use the adjusted trial balance (account balances after the adjusting entries have been posted) to prepare each of the major financial statements. Step 7:Close the accounts—Close the temporary accounts to allow the records to start fresh at the beginning of next period.

Describe the three steps in the closing process.

Step 1: Close revenues to Retained Earnings. Step 2: Close expenses to Retained Earnings. Step 3: Close dividends to Retained Earnings.

outstanding check

a check that has been issued and recorded by the business but that has not been "cashed" by the recipient of the check.

deposit in transit

an amount received and recorded by a company, but which has not been recorded by the bank in time to appear on the current bank statement.

accrued expenses

previously unrecorded expenses that have been incurred, but not yet paid in cash

Expense Recognition Principle

requires that expenses be recorded (recognized) in the same accounting period as the revenues they helped generate

temporary accounts

the accounts of revenue, expense, and dividend items that are used to collect the activities of only one period.