ACCT 2110 Exam 3
"sales discounts"
a contra-revenue account that is subtracted from sales when calculating "net sales"
operating margin
a key ratio for financial analysts because it tells how much is left from a sales dollar after paying for the product and all its operations
sale discounts for the buyer
a reduction to the cost of goods and services
sales discounts gross method
make the assumption up front that the customer will NOT take the discount
sales discounts net method
make the assumption up front that the customer will take the discount
net profit margin=
net income / net sales
accounts receivable turnover=
net sales/average net accounts receivable
operations objectives
objectives that deal with the effectiveness and efficiency of company operations and determine how to allocate resources
reporting objectives
objectives to help ensure the accuracy, completeness, and reliability of company reports; improve decision making; and monitor company activities and performance
accounts receivable
"on account" "trade receivables"- result from sale of goods/services
Sarbanes-Oxley Act
A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.
what is the basis for the financial statements and other reports prepared for managers, owners, and others both inside and outside the business?
Accounting records
match each of the control activities: invoices received from outside suppliers are filed with purchased orders
adequate documents and records
accounting and reporting cash
cash is reported on both the balance sheet and the statement of cash flows
gross profit margin=
gross profit / net sales
match each of the control activities: the person in the controller's office who prepares and mails checks to suppliers cannot make entries in the general ledger system
segregation of duties
sales returns and allowances net method
estimate based on experience
COSO
Framework for enterprise internal controls (control-based approach)
segregation of duties
accounting and administrative duties should be performed by different individuals, no one person prepares all the documents and records for an activity
interest calculation
face value x rate x time
adequate documents and records
summary records and their underlying documentation must provide information about specific activities and help in the evaluation of individual performance
control environment recognizes
that an individual employee's goals may differ from the goals of other individuals and the goals of the business
sale discounts for the seller
the cash is more quickly available and collection costs are reduced
true/false: accounts receivable are shown on the balance sheet at their net realizable value
true
Methods for Estimating Bad Debts
% of receivables % of sales
% of Receivables
- Balance Sheet Approach - Aging analysis of A/R- Different rates applied to different age categories - Calculates the required balance in the allowance account
% of Sales
- Income statement approach - Credit sales * Estimated bad debt % - Calculates the amount of bad debt expense to be recognized
short-term investments
- Keep bank cash balances to a minimum since most bank accounts earn relatively small amounts of interest. - Accordingly, short-term investments are purchased with temporary cash surpluses. - The value and composition of short-term investment portfolios change continually in response to seasonal factors and other shifts in the business environment.
paying for inventory
-The second stage of the operating cycle is paying for inventory -A good cash management principle is to delay payments as long as possible while maintaining a good relationship with the payee -The longer a company keeps cash, the more interest it can collect
elements of internal control
-control environment -risk assessment -control activities -information & communication -monitoring
promissory note
-maker: promises to pay -payee: receives payment -recorded at face value -stronger legal claim/requires interest
the control environment included
-philosophy and operating style of management -personnel policies and practices of the business -the overall integrity, attitude, and actions of everyone in the business concerning the importance of control
management of receivables
-screening customers -determining credit terms and limits -monitoring collections
factoring receivables
-sell receivables; factor changes a % -immediate cash is received -factor assumes rights of collection along with risk of uncollectability -recourse/non-recourse -securitization; package factors receivables and sell them
selling inventory
-third stage of the operating cycle -good cash management suggests increasing the speed of receivable collections -many companies sell their receivables rather than waiting for customers to pay
internal controls for sales
1) purchase order required for sales 2) shipping & billing documents based on purchase order 3) only record sale & receivable when we have purchase order, shipping & billing documents 4) sales returns & allowances must follow proper procedures
types of receivables
1. Accounts receivable 2. Notes receivable 3. Other receivables
bank reconciliation
1. a control function by identifying errors and providing an inspection of detailed records that deters theft 2. a transaction detection function by identifying transactions performed by the bank, so the business can make the necessary entries in its records
3 key cash controls
1. bank reconciliation 2. cash over and short 3. petty cash funds
cash short and over
1. cash receipts should be deposited in a bank daily 2. amount deposited = sum of cash register tapes 3. if differences occur, the discrepancy is recorded in an account called cash over and short 4. one common source of cash over and short is errors in making change for cash sales
5 categories of control activities
1. clearly defined authority and responsibility 2. segregation of duties 3. adequate documents and records 4. safeguards over assets and records 5. checks on recorded amounts
how can a company manage its cash efficiently?
1. delaying paying suppliers (so a company can earn as much interest on their cash as possible) 2. speeding up collection from customers (in order to invest the cash sooner) 3. earning the greatest return on any excess cash
Methods of Accounting for Uncollectible Accounts
1. direct write off 2. allowance method
three changes to sales revenues
1. discounts 2. returns 3. allowances
We have earned the revenue when either
1. goods have been delivered or 2. a service has been performed
5 Step Model for Revenue Recognition
1. identify the contract with the customer 2. identify the performance obligations in the contract 3. determine transaction price 4. allocate the transaction prices to the performance obligations in the contract 5. record revenues or sales when, or as, the entity satisfies the performance obligation
performing a bank reconciliation
1. start with "cash balance from bank statement" and cash balance from company records" 2. these two balances are adjusted as necessary to produce identical "adjusted cash balance" 3. bank balance + bank additions - outstanding checks= adjusted bank balance 4. company balance + bank additions - bank deductions= adjusted company balance 5. these adjusted balances should agree!
differences between the cash account balance and the bank statement balance develop from 3 sources
1. transactions recorded by business, not by the bank 2. transactions recorded by the bank, not yet by business 3. errors in recording transactions on either set of records
2/10, n/30
2% discount if invoice paid within 10 days or total balance due in 30 days
average # of days A/R are on the books=
365/accounts receivable turnover
net realizable value
Accounts Receivable - Allowance for Doubtful Accounts
timing of revenue recognition
GAAP requires accrual-basis accounting, which recognizes revenue when a performance obligation or promise under a contract is satisfied
________________________ reduces the likelihood that unintentional record-keeping errors will remain undiscovered
Segregation of duties
__________________________ reduces the likelihood that records could be used to conceal irregularities and increases the likelihood that irregularities will be discovered
Segregation of duties
buying inventory
The first stage of the operating cycle
other receivables
Various forms of non-trade receivables, (interest receivable, notes to company officers, tax refunds, etc)
outstanding check
a check issued and recorded by the business that has not been "cashed" by the recipient of the check
errors
accidental errors in recording transactions or applying accounting principles
match each of the control activities: each shipment to customers from inventory is recorded on a specially printed form bearing a sequential number; these forms are the basis for entries into the computer system, which make entries to inventory records and procedures periodic reports or sales and shipments
adequate documents and records
sales returns and allowances gross method
adjust when it happens
bank reconciliation adjusting journal entries
adjustments are necessary for any company errors or items such as bank charges or interest that the company does not find out about until receiving the bank statement
classification of receivables
amounts due from individuals or companies and the expectation that cash will be received
petty cash
an amount of cash kept on hand and used for making small payments
deposit in transit
an amount received and recorded by the businesses, but has not been recorded by the bank in time to appear on the current bank statement
information and communication
an internal control system will be unable to help a company achieve its objective unless good information is gathered on a timely basis this information must be communicated to the appropriate employees in the organization
business process risks
arise out of the internal processes of the company, specifically how the company allocates its resources to meet its objectives
direct write-off method
bad debt expense is recognized when a specific amount is deemed uncollectible expense is often recognized in a different period than the revenue associated with the sale violates matching principle
safeguards over assets and records
both assets and records must be secured against theft and destruction
match each of the control activities: at regular intervals, internal audit reviews a sample of expenditure transactions to determine that payment has been made to a bona fide supplier and that the related goods or services were received and appropriately used
checks on recorded amounts
match each of the control activities: cash registers display the price of each item purchased to the customer as it is recorded and produce a customer receipt that described each item and gives its price
checks on recorded amounts
clerical checks, reconciliations, comparisons of asset inspection reports with recorded amounts, computer-programed controls and management review of reports
checks on recorded amounts procedures
Non-sufficient funds checks
checks that have been returned to the depositor because the funds in the issuer's accounts are not sufficient to pay the check
match each of the control activities: only the cashier assigned to the cash register is allowed to perform transactions
clearly defined authority and responsibility
match each of the control activities: division managers are evaluated annually on the basis of their division's profitability
clearly defined authority and responsibility
control environment resolves
conflicting incentives in an ethical manner that promotes organizational objectives is highly dependent on the tone at the top
credit memos
could result if the bank collected a note receivable for the business
true/false: no special internal control procedures are necessary with a petty cash fund because the amount is so small
fale
true/false: Net sales= total credit sales - sales discounts - sales returned and allowances
false
true/false: a balance sheet approach to estimating bad debt expense is not permitted under GAAP
false
true/false: a check written by a company but not yet presented to the bank for payment is called a check in transit
false
true/false: an accounting system must be computerized in order to implement any internal control procedures
false
true/false: if a company accepts a major credit card such as Visa from a customer, then the company is responsible for the amount of the sale in case of nonpayment from a cardholder
false
true/false: if a company has an internal audit function, it does not need to have external auditors
false
true/false: if a company hires honest employees and its top management act with integrity, NO internal control procedures will be necessary
false
true/false: if the bank debits its customer's checking account, then the customer's cash balance increases
false
true/false: on a bank reconciliation, outstanding checks are added to the cash balance per the bank statement
false
true/false: selling on credit protects a company from the risk that some of its receivables will never be collected
false
true/false: the lender of a note recognizes a note payable on the balance sheet and interest expense on its income statement
false
true/false: the longer a customer's account balance remains outstanding, the greater the likelihood that it will be collected in the near future
false
service charges
fees charged by the bank for checking account services
notes receivable
formal debt instrument- normally requires interest sometimes these can also be trade receivables
if information is not _______________________ and ______________________________, then management may not become aware of problems until its too late and returns and complaints are made by dissatisfied customers
gathers and communicated
clear delegation of authority and responsibility motivates
individuals to perform well because they know they are accountable for their actions
allowance method
makes an estimate of uncollectible accounts at the end of each period create an "allowance" account that is then decreased when actual write-offs occur better matching of expenses and revenues
debt memos
might result if the bank makes a prearranged deduction from the business's account to pay a bill
compliance objectives
objectives to help the company comply with all applicable laws and regulations
operating margin=
operating income / net sales
Internal control system
policies and procedures designed to make sure employees operate within the scope of their responsibilities and act for the good of the business
strategic risks
possible threats to the organization's success in accomplishing its objectives and are external to the organization
Section 302 of SOX
principal executive and financial officers must certify that they are responsible for establishing and maintaining the system of internal control over financial reporting
risk assessment
procedures are designed to identify, analyze, and manage strategic risks and business process risks
monitoring
process of tracking potential/actual problems in the internal control system
analyzing sales
profitability ratios are used to try and measure the return the company is making on sales
checks on recorded amounts
recorded amounts should be checked by an independent person to determine that amounts are correct and that they correspond to properly authorized activities
sales discounts
reduction of the normal selling price and is attractive to both the seller and buyer
importance of receivables
represents a significant amount of money trade receivables represent sales revenue that has been recognized, but not collected or realized in cash
Section 404 SOX
requires publicly traded companies to include in their annual report to stockholders and internal control report contains a statement of management's responsibility to establish and maintain internal controls as well as an assessment of the effectiveness of its internal controls FORCES management to be engaged with respect to its internal controls Requires an annual audit of the company's internal control structure and the assessment provided by management
Sales Returns and Allowances
return of defective product or price allowance for minor defects late arrival or any way that makes a product less valuable may be a reason for an allowance
________________________ requires physical protection of the assets as well as access controls for computers
safeguarding
match each of the control activities: a construction company stores large steel girders in an open yard surrounded by a 5-foot fence and stores welding supplies in a controlled-access, tightly secured concrete building
safeguards over assets and records
match each of the control activities: the extent of access to the many segments of the company's computer system is tightly controlled by individual identification cards and passwords that change at regular intervals
safeguards over assets and records
match each of the control activities: employees with access to the accounting records are not permitted to open the mall because it contains many payments by check from customers
segregation of duties
valuation/amount of revenue recognized
the appropriate amount of revenue to recognize is generally the cash received or the cash equivalent of the receivable
cash controls
the authority to collect, hold, and pay cash must be clearly assigned to specific individuals whenever feasible, cash-handling activities and cash record-keepings activities should be assigned to different individuals
clearly defined authority and responsibility
the authority to perform important duties is delegated to specific individuals and those individuals should be held responsible for the performance of those duties in the evaluation of their performance
control environment
the collection of environmental factors that influence the effectiveness of control procedures
control activities
the policies and procedures top management establishes to help ensure that its objectives are met
cash management
the routine, day-to-day administration of cash and near-cash resources, also known as liquid assets, by an individual or family
transactions recorded by business not bank
timing differences
true/false: a debit memo may be issued in the monthly bank statement in order for the bank to notify a company that a service charge has been assessed on the company's account
true
true/false: because the allowance method results in better matching, GAAP requires its use rather than the direct write-off method, unless bad debts are immaterial
true
true/false: the accountant must make adjusting journal entries for all items in the book section of the bank reconciliation
true
true/false: the establishment of a petty cash fund has no effect on the company's total cash balance
true
true/false: the higher the accounts receivable turnover the better because it indicates that the company is more quickly collecting cash
true
true/false: the lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement
true
transactions recorded by banks not business
unknown/unrecognized by the business