ACCT EXAM 2

journal entry for credit cards (without fees)

debit: advertising expense credit: accounts payable

journal entry for credit cards (with fees)

debit: cash debit: service fee expense credit: service revenue

Writing off accounts receivable journal entry

debit:allowance for uncollectible accounts credit: accounts receivable

trade discounts

disguise real price from competitors, give quality discounts to customers, change prices without publishing a catalog

note receivable

formal credit agreement between borrower and lender

Rice Corp. noticed that a check written by the company for $1000 was incorrectly recorded by the bank as $1100. How should this error be handled in a bank reconciliation

$100 should be added to the bank balance

cash return on assets = cash flow to sales x asset turnover

-cash return on assets: Operating c.f/average total assets -cash flow to sales: operating cash flow/net sales -asset turnover: net sales/average total assets

the two conditions that must exist for a sale and related receivable to be recognized are:

-earning process is virtually complete -collection from customer is reasonably assured

Accounts receivable includes:

-nontrade receivables: tax refund claims, interest recievable, and loans by the company to other entities, including stockholders and employees

Uncollectible accounts have the effect of:

1) reducing assets (accounts receivable) by estimating the amount we won't college 2) increasing expenses (bad debt) to reflect the cost offering credit to customers

control over cash receipts(cash/checks)

1. open mail each day, and make a list of checks received including the amount and payers name 2. designate an employee to deposit cash and checks into the company bank account each day, different from the person who receives cash and checks 3. have another employee record cash receipts in the accounting records as soon as possible. verify cash receipts by comparing the bank deposit slip with the account records 4. accept credit cards or debit cards, to limit the amount of cash employees handle

formula for average collection period

365 divided by receivable turnover ratio

Operating activities: GAINS/LOSSES(add/subtract)

Add losses, subtract gains

Operating activities: CURRENT LIABILITIES(add/subtract)

Increases: add, Decreases: subtract

-cash return on assets:

Operating c.f/average total assets

contra-revenue account

account with a balance that is opposite of its related revenue account

what is the best measure of a company's probability

accrual-based net income

Operating activities: EXPENSES (add/subtract)

add expenses

direct method

adjust items on the income statement to directly show the cash inflow and outflows from operations such as cash received from customers and cash paid for inventory, salaries, rent, interest, taxes,

Operating activities: current liabilities are

anything payable

under the indirect method of preparing the statement of cash flows, depreciation expenses and losses are added back to net income because....

aren't cash flow,

indirect method

beings with net income and then list the adjustments to net income, in order to arrive at operating cash flow (companies use this more)

cash inflow for finance activities

borrowing from the bank, issuance of common stock to investors

Cash return on assets = cash flow on sales x asset turnover

cash flow (operating cash flow/net sales) x asset turnover (net sale/average total assets)

Company selling their own common stock is....

cash inflow (financing)

net revenue

company's total revenue minus any sales, returns, allowances

Allowance for uncollectible accounts is what type of account:

contra-asset (which is why you debit, except for when you write-off)

Sales discounts, returns, and allowances are....

contra-revenue accounts which means it has a normal debit balance, and is reduce the reported amount of net income

sales revenue and allowances need a ______ entry to increase the account

debit

journal entry for previously written off accounts

debit: accounts receivable credit: allowance for uncollectible accounts debit: cash credit: accounts receivable

net realizable value

how much company expects to collect. Accounts receivable(how much money you receive through accounts)-amount for uncollectible accounts(expected amount you aren't going to collect)

bank reconciliation: error

if company balance is higher than bank, and the company made the error you have to match the balance so you have to subtract the company balance since the bank is higher. (vise/versa)

which financial statements help forecast a company's cash-generating potential

income statement & balance sheet

bad debt expense is reported in the _____ and classified as _____

income statement, operating expense

the effect of uncollectible account is to...

increase expenses, reduce assets

Operating activities: CURRENT ASSETS(add/subtract)

increases: subtract, decreases: add

accounts receivable

informal credit agreement with trade customers

Operating activities: current assets are

inventory, prepaid rent, accounts receivable

financing activities in statement of cash flows

issuance of bonds, sale of the company's common stock, repurchase of the company's owns stock

bank reconciliation: what does deposit outstanding mean

it is an increase in the banks balance, which you debit (add)

bank reconciliation: what does checks outstanding mean

it means its a liability to the company, which you credit (subtract)

internal auditor

make sure theres no errors, make sure they follow internal control rules

stewards

managers who are entrusted with taking care of the assets of a company

definition: bank reconciliation

matches the balance of cash in the bank account with the balance of cash in the company own record

asset turnover

measures the sale revenue generated for each dollar of assets

receivable turnover ratio formula

net credit sales divided by average accounts receivable (net)

the return on assets is calculated by dividing ____ & ____

net income; average total assets

-asset turnover

net sales/average total assets

Depreciation expense is added back to net income when preparing cash flow from operating activities section because depreciation represents a(n) _____ reduction to net income

non-cash expense. depreciation expense decreases net income on hte income statement but odes not decrease cash from operating activities on the statement of cash flows (no check is written for depreciation expense) deprieciation expense is a non-cash expense and thus is added back to the net income when calculating cash from oeprating activities

-cash flow to sales:

operating cash flow/net sales

Uncollectible is in which (financing, operating, investing)

operating expense, decreases net income by the uncollectible amount

Percentage-of-receivables method

referred to as balance sheet method because you estimate bad debts on the balance sheet- accounts receivable

estimating uncollectible accounts in the following year

t-chart

amortization expense

the allocation(distrubtion) to expenses of the cost of an intangible asset such as a patent, goodwill, bond issue costs, etc

During the month, the amount of cash in petty cash is equal to...

the authorized amount of petty cash less the amount of receipts

Committee of Sponsoring Organizations (COSO) of the Treadway Commision

the framework for designing an internal control system

What occurs when petty cash is used to be pay for an item

the receipt is placed in the petty cash fund

accounts receivable are classified as current assets because...

they will be converted to cash within 1 year of normal operating cycle