ACCTG 231 exam 1

purchase discount application

$1000 is paid at the end of 30 days for a purchase when we could have paid $980 at the end of 10 days. a smart cash manager will realize that the $20 discount not taken should be viewed as a finance charge for keeping the $980 an extra 20 days. what is the rate of interest being paid with this $20 finance charge? $20/ $980 X 20 days/ 365 days = 37% APR

merchandising business

(about 1/3 of the US economy) must plan the items to be sold, the demand for those items, where and when to purchase the items to sell, the amount of staff and training needed to make sales and other resources (buildings, equipment, vehicles, supplies) necessary to support the business. must also plan when cash is going to be collected and paid out. next most complex accounting system due to inventory.

service business

(about 2/3 of the US economy) must plan the types if services to be provided, the demand for these services, the amount of staff and training needed to provide those services and the other resources (buildings, equipment, vehicles, and supplies) necessary to support the business. must also plan and when cash is going to be collected and paid out. least complex form of business to do the accounting as they do not have inventories.

manufacturing business

(about 5% of the US economy and shrinking) must plan the items to be sold, the demand for those items, how to make the items, what components will be used to make the items, when and where to purchase the components, the amount of staff and training needed to manufacture the item and make sales and other resources (buildings, equipment, vehicles, supplies) necessary to support the business. must also plan when cash is going to be collected and paid out. most complex accounting system due to multiple inventory accounts.

3.) deliver goods or services to customers

-bill of lading document indicates the terms as agreed between the seller and common carrier. -shipping terms: dictate when ownership of goods transfers, who has risk of loss and who pays the freight and insurance costs -FOB: free on board (is free for someone, either the buyer or seller) -FOB shipping point: sale occurs at the shipping point a.) a buyer will have to cover these costs b.) buyer owns goods, has risk of loss as soon as goods are loaded on carrier -FOB destination: sale takes place at the buyer's place a.) seller owns goods while in transit b.) title of goods transfers upon tender of delivery/bill of lading, in other words the sale occurs at the point of destination -importance of shipping terms: a.) a measurement of income and/or expense b.) ownership of goods and risk of loss

2.) selecting vendors and ordering the goods/services

-use a purchase order (PO) to send to the vendor -detail terms, shipping instructions, quantity, and type -if accepted by the vendor, two legal results a.) legal contract binding vendor to supply the items b.) purchaser bound to pay for the items

1.) determine business's needs for goods/services

-use a purchase requisition with a centralized authority issue. -details vendor, quantity, when needed, authority, etc.

4.) billing credit customers and collecting payment

-use a sales invoice; request payment from the customer. customer then goes through their expenditure cycle. payment terms/sales discounts; 2/10, n/30

1.) determine marketing and distribution channels to generate sales

cash or credit? -debit cards; electronic receipt within 24 hours, considered a cash equivalent -checks; float can delay cash receipt for days, considered a cash equivalent -open accounts - accounts receivable (A/R) this is credit but not a secured debt a.) no formal agreement or collateral b.) must see for a judgement then collect the judgement -credit cards- store cards vs. independent cards a.) store card gas risk of loss like a A/R but is formal debt b.) independent card; visa, MasterCard, AM express, discover i.) get cash fast; 24-48 hours, as good as cash, considered cash equivalent ii.) charge an intercharge fee that ranges from 1.5% - 10% notes receivable (N/R); formal agreement, secures collateral

the 3% interchange fee will be deducted from the amount of cash that cabelas receives from visa and discover

Cabela's had $105,350 in visa and discover card sales, $45,391 in store card sales, and $35,624 in cash and check sales. visa and discover have a 3% interchange fee, which of the following is true about cabela's receipt of cash? a.) cabala's will receive cash from customers that used store cards within 24-48 hours b.) the 3% interchange fee will be deducted from the amount of cash that cabela's receives from visa and discover c.) the cash from the visa and discover sales will be collected when customers pay their bills d.) cabela's bears the risk of loss for their instore card sales and the visa and discover card sales

buyer

FOB shipping point indicates that goods in transit belong to the: a.) seller b.) buyer c.) common carrier d.) either the buyer or the seller

Enhancing Qualitative Characteristics

Four elements enhance the usefulness of information that is relevant and faithfully represented: 1.) understandability 2.) timeliness 3.) verifiability 4.) comparability

what is risk?

depends on: 1. your assessment of risk; based on the probability of a particular outcome 2. tolerance for risk a.) risk averse- prefer the known over the unknown b.) risk takers- are comfortable with the perceived risk

revenue process

determining the credit and payment policies for customers is part of the: a.) collection process b.) expenditure process c.) conversion process d.) revenue process

periodicity

divide the life of the business into regular intervals to provide financial reports and information to users on a regular basis. cannot exceed 1 year in length, but may be shorter such as one month. some report on a fiscal year basis, which merely means they have any year end other than December 31. an example of this concept in application is companies issuing financial statements monthly, or annually.

what is business?

enterprise designed to accomplish a task, or an organization of individuals providing goods or services to accomplish a specific objective. 1. for profit 2. not-for-profit

expenditure cycle

events in which the business exchanges assets for goods and services. three goals: 1.) get the best quality good/service at the last cost when needed 2.) ensure timely payment for a good/service 3.) develop a good relationship with suppliers

revenue cycle

events that involve providing goods/services to customers. three goals: 1.) meet customer needs; quality/quantity, price and type 2.) collect payment in; a timely fashion 3.) provide support to assure; future sales

why go into business?

everyone will be in business. it is not a option situation. everyone will be involved in business at some point in their careers if they are any good at all. trends and research indicate that 9 out of 10 businesses will fail.

$83.33

if a company borrows $20,000 at an APR of 5% for one year, how much interest Is due at the end of one month? a.) 1,000 b.) 83.33 c.) 100 d.) 565

faithfully represented

if information contains errors it is not...

material

if something could affect a user's decision, it is considered____________?

falsee

in the bank reconciliation, O/S checks and DITs are adjustments the bank must make

understandability

information must be properly classified, characterized, and presented clearly. it is not so much about making it easy to understand, but rather complete and clearly presented. it is assumed that the reports and information presented for users who have reasonable knowledge of business and economics to be able to use the information.

3.) receiving, securing, and storing goods

inspection process to include a receiving report as goods arrive -details id goods meed pre-agreed upon terms to include type and quantity -condition of the goods is acceptable

Faalse

internal control is used by companies to prevent all frauds from occurring

opportunity

internal control limits which of the following from the fraud triangle?

false

internal control prevents all thefts and fraud from occurring?

failing to plan

is planning to fail; reactive

planning

is risk management; proactive

relevance

is the information capability of making a difference in the decision. consists of three elements: 1.) predictive value 2.) confirmatory value 3.) materiality

4.) physically controlling assets and documents

limit access to assets to prevent unauthorized use, theft, or damage; control access ti documents which may be used to initiate unauthorized transactions which in turn give access to assets passwords, store information off site as backup, sign in requirement for a tool room, control access theme

casual investors in a corporation

limited liability applies to: a.) partners in a partnership b.) the owner of a sole proprietorship c.) the owner of a corporation d.) casual investors in a corporation

control procedures

means by which the control objectives are met

2/10, n/30

means that a 2% discount can be taken if the balance is paid in 10 days, but the total amount (net) is due in 30 days if discount is not taken advantage of

historical cost

measure and record the event based on the cost at the cash or cash-equivalent amount at the time of the accounting event. this is the least biased approach, example if this concept un application is that once recorded, we do not go back and change the entry if the value changes in the future.

monetary unit

money is the measurement tool of economic activity, not cows, sheep, rocks, or gold. an example of this concept in application is recording all events in dollars.

2.) separating incompatible duties

no one person is assigned duties that include a combination of the following four activities: transaction chain: authorization > execution > custody > recording

not-for-profit

objective is other than profit seeking; for example the Red Cross's objective is humanitarian relief. however they must still generate a profit to service.

for profit

objective may be profit seeking, designed with the mandate to create a profit; which is revenue in excess of expenses

$7,390

on may 31, Allegro company had a general ledger cash balance of $7,400. at the end of may, the bank statement had a balance of $7,500. deposits in transit amounted to $1,000 and there was a service charge of $10. outstanding checks totaled $1,110. what is the correct amount of cash? a.) 7,390 b.) 7,000 c.) 6,390 d.) 6,380

sole proprietorship

one person ownership. most common form, number 22,614,000, about 72% of all businesses. -ease of formation, few legal requirements -usually small due to limited resources availability -not taxed as a separate legal entity; the person is the business and the business is the person. taxes paid on the individual's personal tax return. -unlimited liability; can lose everything you own to satisfy creditors. -limited life; owner quits or dies, so does the business

the fraud triangle

opportunity --> rationalization --> pressure-motivation

2.) receive and accept orders

orders are recorded using a sales order. approving customer credit for credit sales - background checks of credit history, setting credit limits

external

outside the company or outside the company decision process. making operating, investing, or financing decisions for themselves. use general purpose financial statements "all things to all users" reports are not tailor made, but rather general purpose in nature, under rules of accounting referred to as GAAP (generally accepted accounting principles)

borrow from the bank to take the discount

Millie's pet company has a vendor that offers a purchase discount with a 12% APR. they recently purchased $2000 of dog food, but do not have enough cash to take advantage of the discount offered. however, they have the ability to borrow money from the bank at an 8% APR. should Millie's pet company borrow money from the bank to take the discount or wait until they have enough cash on hand to pay the entire bill? a.) borrow from the bank to take the discount b.) wait until they have enough cash on hand to pay the full amount

red flags

personal: gambling activity, reworking records, keeping records out of the normal filing or processing system, receiving "gifts" from suppliers, skipping vacations, days off or working excessive weekends, large personal purchases such as new cars, vacation houses, etc.. avoiding promotion opportunities management: pressure to meet earnings expectations ("meet the street"), decisions are dominated by one person, reputation in the community is poor, attitude toward financial reporting is unduly aggressive

predictive value

potential to form an opinion or gain insight about future events

interest calculation

Principal X Annual Rate X Time = $ interest due 1.) $1000 is borrowed from the bank for one year at 10% APR. what is the $ amount of interest that will be owed on this loan? $1000 X .10 X 365 days/365 days = $100 interest due 2.) $1000 is borrowed from the bank for 90 days of the year at 10% APR. what is the $ amount of interest that will be owed in this loan? $1000 X .10 X 90 days/365 days = $25 interest due RESULT: borrowing for a shorter length of time at the same interest rate results in less interest being paid 1.) $900 is borrowed for one year and $90 is being charged in the borrowing for interest. what is the rate of interest being paid? $90/ $900 X 365/365 = 10% APR 2.) $900 is borrowed for 45 days and $90 is being charged on the borrowing for interest. what is the rate of interest being charged? $90/ $900 X 45/365 = 80% APR

$74,205

purple, Inc. purchased $76,500 of parts from a vendor who offered credit terms of 3/15, n/45. if purple inc. takes advantage of the discount, the amount paid to the vendor will be: a.) 74,205 b.) 76,500 c.) 76,271 d.) 75,350 76,500 x .03 = 2,295 76,500 - 2,295 = 74, 205

compensating controls

Quinter, INC. a small company, has only one accountant. this person performs all custody, recording, and authorization functions for the business. what is the term for an alternative control that can be put into place by the owner of Quinter, INC. to make up for the lack of separation of incompatible duties? a.) replacement controls b.) compensating controls c.) new controls d.) changing controls

F

T/F: all companies are required to follow GAAP

5.) collecting from customers

receive a remittance advice with the customer payment to identify the correct amount. if a cash sale may provide a sales slip to the customer and use to record the sale in our records. -want to properly update customer accounts as payment is received. avoid double billing. -billing can be very expensive to maintain 6.) provide support after the sale

has not cleared the bank

a deposit in transit or DIT is one that: a.) has not cleared the bank b.) was not recorded in the books

GAAP (generally accepted accounting principles)

a major premise of accounting structure. EX: industry practices, governing organization pronouncements- FASB and SEC, and government regulations- legislative bodies these principles or rules must be followed in the financial statements of all companies that sell their stock to the public in the United States.

lapping of accounts receivable

a method of covering up the embezzlement of cash. most likely to occur when there is inadequate segregation of duties; the employee has access to cash or incoming checks and the accounting records. the employee will steal a collection from a customer, but the customer is not credited for the payment. red flags: excessive billing errors or write off accounts receivable, delays in posting customer payments, a trend of decreasing payments on accounts receivable, customer complaints

cost employees

a non-existent employee record is set up (often with a dead person's social security number). often linked by direct deposit to a bank account accessible by the embezzler. red flags: -these employees do not have any withholding. after all, the social security administration will figure out that a dead person's number is suddenly active. -net payroll expense will be lower than actual cash disbursed because it does not include any expense from amounts paid to ghost employees -multiple direct deposits made to the same bank account, but under different employee names

fictitious companies

a segregation of duties problem, the perpetrator creates one or several companies. they then create invoices from these companies that are "sent" to themselves inside the firm they are embezzling from. they authorize or execute payment to the companies, later withdrawing the funds for their own use.

3.) maintaining adequate documents and records

a.) prepared at the time of transaction to ensure accuracy of input, complete information, and provide for customer approval b.) pre-numbered to control missing documents and enable tracing c.) constructed to promote correct preparation d.) easy to understand approving a credit application, signing a check authorization process should be concentrated

T

accounting can be defined as financial communication, or the language of business

what is accounting?

accounting has evolved to meet user needs. as business has become more complex so has accounting. evolution in the book illustrates this point as well. can be defined as financial communication.

the language of business

accounting is...

maintaining adequate documents and records

all checks used by Graphics, INC. to pay its bills are prenumbered. this is an application of which of the following internal controls? a.) maintaining adequate documents and records b.) physically controlling assets and documents c.) requiring proper authorization d.) separating incompatible duties

complete

all the information necessary for the user to fully perceive what is being reported. this will require descriptions and explanations of the information.

a.) has not cleared the bank

an outstanding check is one that: a.) has not cleared the bank b.) was not recorded in the books

going concern

assume the entity will continue into the future. as such must do the financial recording as we go so the information is available to make decisions. at one time in early business ventures, they waited to record everything until the business venture was completed, then completed the accounting. an example of this concept in application is a firm recording transactions as they occur and reporting on a regular basis.

corporations

separate legal entity apart from the owners number 5,847,000, about 19% of all businesses -popular when need a lot of resources to start the business, investors involved -requires permission of the state to form -issue stock as the ownership interest. stockholders can sell, buy, or trade ownership interest on the secondary stock markets. ease of all ownership transfer. -corp. has legal rights; enter into contracts, sue, be sued, etc. unlimited life; death of a stockholder does not end the business -limited liability; creditors cannot seize the personal property of the stockholders to satisfy company debts without outside agreement. the most that a casual investor (not a part of management) can lose is their original investment. this criteria has nothing to do with being sued. if a corp. and the stockholders are sued, and the stockholder has management decision power, they will be held accountable for any court finding and can lose personal assets. this criteria only protects a casual investor who is not involved in management decisions. -double taxation; the corporation is taxed as an entity unto itself, dividends (distribution of earnings) to stockholders are then taxed at the individual level.

internal control

should satisfy four objectives 1.) safeguard assets (protect your stuff) 2.) provide accurate and reliable information 3.) promote operational efficiency 4.) encourage adherence to prescribed managerial policies (these policies may be designed to assure compliance with laws and regulations or just to help assure management's wishes are followed)

1.) requiring proper authorization

someone is given authority by the business to approve the transaction

6.) compensating controls

sometimes an alternative control is used to make up for the fact that another control is not in place. for example, for a small business, it may not be possible or practical (cost > benefit) to have all these internal controls. however, the owner tends to also be very involved in the day to day operations and can observe employees' work (i.e. an independent check on performance) which may make up for the lack of control. recall our pervasive constraint: benefits > costs

skimming

the act of removing funds from a sale prior to recording the sale. it can be the result of an overcharge to the customer then pocketing the overcharge, recording the sale at a discount then pocketing the discount portion, or merely recording the sale for a lesser amount (especially in the case of services) fixes: -require that a customer receive a receipt. -do not allow refunds (or voids) without authorization

benefits > costs

the benefits of the information must exceed the costs to provide or obtain that information. applies to all of the elements of the characteristics of information.

separating incompatible duties

the bookkeeper who records cash receipts also deposits daily cash receipts at the bank on his way home from work. this is a violation of which of the following characteristics of good internal control? a.) requiring proper authorization b.) maintaining adequate documents and records c.) physically controlling assets and documents d.) separating incompatible duties

true

the books will be updated for amounts on the bank statement not on the books

requiring proper authorization

the controller of Allitron, INC. is one of two individuals in the company allowed to sign checks. this is an application of which of the following internal controls? a.) separating incompatible duties b.) maintaining adequate documents and records c.) requiring proper authorization d.) physically controlling assets and documents

neutral

the financial information is without bias in what is selected and shown without slant, weight, emphasis, or de-emphasis.

falsssee

the goal of bank reconciliation is to prevent fraud

free from error

the information is accurate in all aspects. this includes relevant omissions.

timeliness

the information must be available ti decision makers in time to be capable of influencing their decisions. the older the information is, the less useful it becomes.

business entity concept

the owner of a dry cleaning business maintains separate checkbooks for his business and his personal affairs. this best describes am application of: a.) business entity concept b.) going concern concept c.) monetary unit concept d.) periodicity concept

materiality

the point at which the size of an economic or accounting event will begin to influence a user's decision. is typically different for each person. an example of this concept in application is if you would stop in the parking lot to pick up a dropped penny if you were late to class? some folks would, some would not. information is material if leaving it out or misstating it could influence the decisions users could make about the specific entity under consideration.

decision usefulness

the primary purpose of financial information. to provide this usefulness the information must be relevant and faithfully represent what it purports to be.

business entity

there is a difference between separate legal entity and separate economic entity. for accounting purposes, a business is always separate and distinct from its owners and creditors. keep the accounting for separate entities separate, such as personal versus business. this allows for a focal point for the accounting. am example of this concept in application is maintaining a separate checking account for the business. no personal transactions are allowed in the business account.

d.) faithful representation

there were only 30 tubs of ice cream to be sold, but the listing said 38. which qualitative characteristic does this listing lack? a.) enhancing information b.) timeliness c.) relevance d.) faithful representation

confirmatory value

think of this as feedback value. it may confirm or change previous conclusions about the financial information.

comparability

this element enables the users to identify and understand similarities and differences among items. this requires at least two items to be under inspection. comparability does not mean consistency or uniformity must be present or enhanced.

verifiability

this means that different knowledgeable and independent observers could reach the same conclusions. documentation can aid the process of verifiability.

evolved over time to meet the user's needs

throughout history, business transactions have become more complex over time. as a result, accounting has: a.) not changed since inception b.) changed to make it easier for companies to do accounting c.) evolved over time to meet the user's needs d.) both b and c

faithful representation

to be completely useful, financial information must represent relevant phenomena, and must faithfully represent the phenomena that it purports to represent. three characteristics necessary for faithful representation: 1.) complete 2.) neutral 3.) free from error

false, revenue - expense

true/false: expense - revenue = profit

partnership

two or more owners number 3,146,000, about 9% of all businesses. -need a partnership agreement. without a partnership agreement, the court can dictate outcome disputes under the uniform partnership act. -ease of information, few legal requirements -unlimited liability; creditors can seize personal assets to satisfy debt -mutual agency; each partner is responsible for actions of other partners -limited life; death of any one of the partners dissolves the partnership -not taxed as a separate legal entity. the partners pay tax on profits at the individual level on their personal tax return

4.) paying for goods and services received

vendor sends an invoice requesting payment -the paying firm should: reconcile the invoice to the purchase order and the receiving report before making payments -purchase discounts: discount to encourage customer payment by a certain time. terms appear on the invoice in a fashion like this sample: 2/10, n/45 ex: assume 2/10, n/45 365/(invoice days - discount days) X discount %/(100% - discount %) 365/(45-10) X .02/(1.00-.02) = 21.3%

5.) providing independent checks on performance

verification of performance by someone who was not originally responsible for preparing the data. this may be someone internal to the organization or it may be a customer or vendor. approving a refund to a customer, bank reconciliation, trust but verify theme

24.8%

what is the APR associated with 2/30, n/60 discount offered to customers? a.) 3.0% b.) 10.2% c.) 12.24% d.) 24.8%

revenue - expense

what is the profit definition?

the book balance must be reduced by $900

when completing a two column bank reconciliation for January, the accounting clerk noticed an error for a deposit made in January. while the clerk recorded a $1,000 deposit in the accounting records, the bank recorded a $100 deposit in the bank account, after double checking the deposit information, the clerk realized the accounting records were wrong and the bank recorded the deposit correctly. which of the following is true about the January bank reconciliation? a.) the bank balance must be increased by $900 b.) the book balance must be reduced by $900 c.) the bank balance must be reduced by $900 d.) the book balance must be increased by $900

to prevent fraud

which is not part of the goal of bank reconciliation? a.) to find the correct cash balance b.) to prevent fraud c.) to ensure the bank and the book records agree d.) these are all goals of bank reconciliation

Red Cross

which of the following is NOT an example of a for profit company? a.) walmart b.) koch industries c.) red cross d.) chick fil a

stolen deposits

which of the following is a type of fraud that a bank reconciliation can detect? a.) skimming b.) ghost employees c.) stolen deposits d.) fictitious companies

the company which supplies the baked goods for the bakery

which of the following is an external stakeholder in a supermarket? a.) the manager of the produce department b.) the company which supplies the baked goods for the bakery c.) the cashier at the checkout counter d.) the chief financial officer at the supermarkets corporate headquarters

receive goods and services

which of the following is not part of the revenue process? a.) receive and accept orders for goods and services b.) receive goods and services c.) receive payments for goods and services rendered d.) provide customer support

the person receiving cash in the main makes out the deposit ticket, deposits the cash, and then records the deposit in the accounting records

which of the following reflects a weakness in the internal control of cash? a.) cash register generates a receipt that documents the cash sales that is given to the customer b.) only one employee has access to a cash register in order to reduce a chance of theft c.) the person making out a check must get authorization before the check is sent d.) the person receiving cash in the mail makes out the deposit ticket, deposits the cash, and then records the deposit in the accounting records e.) none of the above has an internal control weakness

profit = revenue - expense

which of the following represents the profit equation? a.) profit = expense - revenue b.) profit = revenue - expense c.) profit = revenue + expense d.) profit - revenue - sales

both a sole proprietorship and a corporation

which type of business may be owned by one individual? a.) corporation b.) sole proprietorship c.) partnership d.) both a sole proprietorship and a corporation

corporati0n

which type of entity could have double taxation

corporation

which type of entity has limited liability

sole proprietorship

which type of entity is the easiest to form?

sole proprietorship and corporation

which type of entity(ies) can have one owner?

2% discount if paid within 30 days

wildcat corporation has purchased raw materials from a vendor and was offered credit terms of 2/10, n/30. which of the following explains these terms? a.) 20% discount (2/10) if paid within 30 days b.) 2% discount if paid within 10 days c.) 10% discount of paid within 30 days and 2% after 30 days d.) 2% discount if paid between 10 and 30 days

$1200

wildcat floral company has 2/10, n/30 terms with their wholesale flower vendor. their most recent invoice was for $1,200 but they do not have enough cash on hand to take advantage of the discount, and they don't have the option to take a loan from the bank. if they do not take advantage of the discount, how much will wildcat floral company pay their vendor? a.) 1400 b.) 1176 c.) 1224 d.) 1200

internal

within the company and within the company decision process. making operating, investing, and financing decisions for the company. get tailor made reports to fit specific needs; the user gets what they ask for.