Accounting exam 2

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Terms

2/10, n/30 = 2% discount if invoice paid within 10 days or total balance due in 30 days

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

5 Components of internal control

Safeguards over assets and records

A construction company stores, large, steel, girders in an open yard surrounded by a 5 foot fence and stores welding supplies and a controlled access tightly secured concrete building

Petty cash

A fund used to pay for small amounts to avoid the time and expense of writing a check

The day the meals are served

A local catering company should recognize revenue from its catering services when?

net realizable value (the amount we expect to receive in cash)

Accounts Receivable - Allowance for Doubtful Accounts

Risk assessment procedures(component of internal control)

Also called ERM are designed to identity, analyze , and manage strategic risks and business processes risks

Information and Communication (component of internal control)

An internal control system will be unable to help a company achieve its objective, unless adequate information is identified and gathered on a timely basis. This information must be communicated to the appropriate employees in the organization. If Information is not gathered and communicated, then management may not become aware of problems until it is too late.

Deposit in transit

And I'm not received and recorded by the business, but not yet recorded by the bank

Checks on recorded amounts

At regular intervals, internal audit reviews a sample of expenditure transactions to determine that payment has been made to a bona fide supplier that the related goods or services were received an appropriately used

When does stockholders equity decrease using the allowance method

At the end of the accounting period when the adjusting entry for bad debts is recorded.

% of receivables method

Balance sheet approach; aging analysis of AR - different rates applied to different age categories. Calculates the required final balance in the allowance account

Checks

Cash controls are more effective when companies pay with ___ for a majority of transactions

Checks on recorded amounts

Cash registers display the price of each item, purchase to the customer as it is recorded and produce customer receipt that describes each item and gives its price

Control activities (component of internal control)

Clearly defined authority and responsibility, segregation of duties, adequate documents and records, safeguards over assets and records, and checks on recorded amounts

(risk management-component of internal control)

Common processes include material acquisition, logistics and distribution, branding and marketing, and Human Resources

Sales Returns and Allowances

Contra revenue accounts that constitutes an adjustment to sales

Gross Method of Cash Discounts

Discounts taken are a reduction of sales revenue, adjust when it happens

Clearly defined authority and responsibility

Division managers are evaluated annually on the basis of their divisions profitability

Adequate documents and records

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 makes entries to inventory records and procedures, periodic reports of sales and shipments

Segregation of duties

Employees with access to the accounting records are not permitted to open the mail because it contains many payments by check from customers

When a company uses the direct write off method of accounting for that does the establish an allowance for doubtful accounts?

False

Control environment and ethical behavior

Foundation of internal control; collection of environmental factors that influence the effectiveness of control procedures

timing of revenue recognition

GAPP requires accrual-basis accounting which recognizes revenue when is performance obligation is satisfied

Gross Profit Margin

Gross Profit/net Sales

True

If a bank credits a customers account that customers cash balance increases

False

If a company hires honest employees and its top management acts with integrity, NO internal control procedures will be necessary

True

In a sound system of internal control, cash receipts should be deposited daily

Internal controls

Include all the policies and procedures established by top management and the board to provide reasonable assurance that the companies objectives are being met in the following areas 1) effectiveness, and efficiency of operations 2) reliability of financial reporting 3) compliance with applicable laws and regulations

% of sales method

Income statement approach, credit sales estimated bad best %; calculates the amount of bad debt expense to be recognized

Face value * rate * time (x/12)

Interest calculation

adequate documents and records

Invoices received from outside suppliers are filed with purchase orders

Petty cash

Issuing checks to pay small amounts is usually more costly than paying cash, so companies establish a son to pay for items, such as stamps or a cake for an employee birthday party. Overseen by a petty cash custodian

Short-term investments

Keep bank cash balances to a minimum and purchase short-term investments with temporary cash surpluses.

Operating margin

Key ratio for financial analysts. Tells how much is left from a sales dollar after paying for the product and all its operations

Means operating efficiently

Lower # of days in inventory

Gross method

Make the assumption up front that the customer will NOT take the discount

Net method

Make the assumption up front that the customer will take the discount

Allowance method - contra asset account

Makes an estimate of uncollectible accounts at the end of each period. Creates an allowance account that is decreased when actual write offs occur. Better matching of expense and revenue

365/accounts receivable turnover

Measures the average # of days A/R are on the books

buying inventory; objective keep inventory levels low to decrease cash need

Money that is tied up in inventory sitting on the shelves is not earning any return

Accounts Receivable Turnover

Net Sales / Average net Accounts Receivable

selling inventory

Often produces receivables; increasing collection can include selling receivables at a reduced rate to access faster cash collection.

Net Profit Margin

One of the most important indicators of a companies overal financial health

Clearly defined authority and responsibility

Only the cashier assigned to the cash register is allowed to perform transactions

safeguards over assets and records (control activity)

Pertains to the physical safety of assets and documents. Secured against theft and destruction. Physical protection such as vaults, locks, keycard access, anti theft tags

True

Petty cash is not considered to be a cash equivalent

Control activities (component of internal control)

Policies and procedures top management establishes to help insure that objectives are met. These are most directly related to the accounting system and financial statements

Strategic risks (risk management-component of internal control)

Possible external threats to the organization's success in accomplishing its objectives

Allowance

Price allowance for minor defects

Monitoring Activities(component of internal control)

Process of tracking potential and actual problems in the internal control system. It is accomplished through normal supervising activities, such as when a manager asks a subordinate how things are going. For example internal audit group

Maker: promises to pay Payee: receives payment (records N/R) Recorded at face value Stronger legal claim/ requires interest

Promissory note

It serves as a control function by identifying errors and providing an inspection of detailed records that detects theft and it detects bank transactions so the business can make the necessary entries in its records

Purposes of bank reconciliation are:

direct write-off method

Recognized when a specific account is deemed uncollectible, only actual losses are reflected in bad debt expense. Expense is often recognized in a different period than the revenue associated with the sale. Violates matching principle. FASB does not allow unless bad debt is insignificant

Control Environment (component of internal control)

Recognizes that an individual employee's goals may differ from the goals of the business, leading to unethical acts, like shipping sales at the end of the year. Ethics hotline created to encourage anonymous reporting of unethical behavior

segregation of duties (control activity)

Reduces the likelihood that record could be used to conceal irregularities and increases likelihood irregularities will be discovered

SOX and COSO

Refers to an influential report released in 1992 by the committee of sponsoring organizations of the Tradeway commission. The report was the culmination of the committees exhaustive research and deliberation on the elements of sound internal controls.

Liquidity

Refers to the ease with which an asset can be converted to cash. More liquid assets are more likely to be stolen.

True

Replenishment of petty cash does not impact the balance of the petty cash fund

checks on recorded amounts (control activity)

Requires independent verification, reconciliation of accounts etc. these procedures include clerical checks, reconciliations, comparison of asset inspection reports with recorded amounts, computer-programed controls, and management review of reports.

Section 404 of Sarbanes Oxley

Requires management to produce an internal control report, acknowledging that management is responsible for establishing and maintaining an adequate internal control system, and procedures for financial reporting, and assessing the effectiveness of these controls

Credit memos

Results if the bank collects a note receivable for the business and deposits it into the business bank account; these are recorded by the bank, but not recorded by the business, causing the bank account to be larger than the business cash account balance

Debit memos

Results with prearrange deductions, by a bank from a business account to pay a bill, like utility bill; these are recorded by the bank, but not yet recorded by the business causing the bank balance to be smaller than the business cash balance

Top Management of the company

Sarbanes-Oxley Act says who is primarily responsible for establishing/maintaining a system of internal control over the company's financial reporting?

True

The accounts receivable turnover ratio provides a measure of how many times average trade receivables are collected during the period

Cash Over and Short

The amount deposited should equal the total of cash register tapes. If it does not, an account that records the discrepancies between deposited amounts of actual cash received and the total of the cash register tape.

-The philosophy and operating style of management -the personnel, policies, and practices of business -the overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control (tone at the top)

The control environment includes

What does the two in 2/10, net 30 represent on a sales invoice

The discount percentage

Safeguards over assets and records

The extent of access to many segments of the company's computer system is tightly controlled by the individual identification cards and passwords that change at regular intervals

No discount will be recorded at the point of the sale

The gross method of recording sales means...

Income Statement

The percentage of sales approach is closely related to:

Segregation of duties

The person in the comptroller's office, who prepares and mails checks to the suppliers, cannot make entries in the general ledger system

True

The stronger the system of internal control, the higher the accuracy of the companies accounting records, and financial reports

1) transactions recorded by the business, but not recorded by the bank in time to appear on the current bank statement 2)transactions recorded by the bank, but not yet recorded by the business

Three differences to resolve between the cash account balance and the bank statement balance

-bank reconciliation -cash over and short monitoring -petty cash management/fund

Three important areas were the accounting system interacts with the internal control system to strengthen cash controls (cash should be safeguarded in vaults and banks)

Information and Communication (component of internal control)

Timely reporting of returns and complaints made by dissatisfied customers allows management to respond before company reputation is damaged.

-Service charges, Nonsufficient funds (NSF), debit memos, and credit memos

Transactions are recorded by the bank, but not yet recorded by the business

Two types outstanding checks and deposits in transit

Transactions recorded by the business but not yet recorded by the bank

adequate documents and records (control activity)

Underlying documentation must be thorough to allow evaluation of performance

Accounts receivable balance - the allowance for doubtful accounts

What is the net realizable value of accounts receivable?

Net sales

What remains after all returns, allowances and sales discounts have been subtracted from gross

True

When a bank pays interest on a company's checking account balance, the bank will likely use a credit memo

False

When reconciling a bank account, the company has to prepare and adjusting entry for outstanding checks

False

When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit

Bank balance

When reconciling the bank statement, would you adjust the bank balance, or company, cash balance for outstanding checks?

Bank balance

When reconciling the bank statement, would you just the bank balance for the company cash balance for a deposit in transit?

When the customers is expected to pay in the discount period

When should the net method be a used to record sales revenue?

Contra account

Which of the following best describes the allowance for doubtful accounts

Deposit in transit

While preparing a bank reconciliation, which of the following items would be added to the bank statement balance?

Company cash

While reconciling the bank statement, would you adjust the bank balance or company cash balance for a bank service charge?

A Deposit in transit

amount received and recorded by the business, but not yet recorded by the bank in time to appear on the current bank statement. This occurs for deposits made after hours or cut off times, causing the bank balance to be smaller than the business's cash account balance.

outstanding checks

are issued and recorded by the business, but I'm not yet been "cashed" out by the recipient of the recipient of the check, therefore the bank has not recorded the check lowering the businesses account ye

Business process risks (risk management-component of internal control)

arise out of an individual company's internal processes— how the company allocates its resources to meet its objectives.

Nonsufficient funds (NSF)

check our checks returned to the depositors, because the insurance amount does not have enough cash to pay the check; these cause the bank balance to be smaller than the businesses, cash account balance

Sales discount

contra revenue account that is subtracted from sales when calculating "net sales"

paying for inventory

delay payments as long as possible so more interest can be collected on cash investments

Service charges

fees, charged by the bank for checking account services; there, unrecorded by the business, causing the bank balance to be smaller than the businesses, cash account balance

The COSO framework

has become the standard for understanding what good internal controls look like

Clearly defined authority and responsibility (control activity)

identifies who has authority to perform important duties and responsibility for performance of assigned tasks. Motivates individuals to preform well

Net profit margin

net income/net sales

Operating margin

operating income/net sales (how much is left from a sales dollar)

segregation of duties (control activity)

reduces the incidence of fraud because no one person prepares all the documents and records for any one type of activity

trade receivables

represent sales revenues that have been recognized but not collected or realized in cash

Section 302

requires the principal executive and financial officers to certify that they are responsible for establishing and maintaining the system of internal control over financial reporting

net method of cash discounts

sales are recorded net of discount,estimate based on experience


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