Acct 041

Physical Controls

Safes, vaults, safety deposit boxes; locked warehouses and storage cabinets; cpu facilities w/ passwords , etc

Net Income/Loss =

Sales Revenue - COG Sold - Operating Expenses

Inventory turnover rate =

Sales/Inventory = (COG Sold/Avg Inventory)

Financial Accounting Standards Board

The primary accounting standard-setting body in the United States

Cost Principle

says that companies record assets at their cost

gross profit rate=

(Revenue - COG Sold)/Net Sales

Periodic Inventory System

* COG sold determined by count @ end of accounting period * determines inventory on hand * estimates inventories more frequently

Perpetual Inventory System

* Maintain detailed records of the cost of each inventory purchase and sale * Records continuously show inventory that should be on hand * Company determines cost of goods sold each time a sale occurs * Provides better control over inventories

Cash-Basis Accounitng

* Revenues recognized when cash is received * Expenses recognized when cash is paid * NOT in accordance with GAAP

Accrual-Basis Accounting

* Transactions recorded in periods in which events occur * Revenues are recognized when earned rather than when cash is received * Expenses are recognized when incurred rather than when paid

Reconciling Bank Account

* reconcile balance per books and balance per bank to their adjusted (corrected) cash balances * Reconcile deposits in transit, outstanding checks, bank memos, and errors (all these are known as time lags)

Accounting Cycle

1) Analyze business transactions 2) journalize transactions 3) post to ledger accounts 4) prepare a trial balance 5) Journalize & post adjusting entries 6) Prepare an adjusted trial balance 7) prepare financial statements 8) Journalize & post closing entries 9) prepare a post-closing trial balance

Average Cost (3 things)

1) COG available for sale on basis of weighted-avg unit cost incurred 2) assumes goods are similar in nature 3) applies weighted-avg unit to units on hand to determine cost of ending inventory

Components of Internal Control (4 things)

1) Control environment & activities 2) Risk assessment 3) Information & communication 4) monitoring

What does the journal do?

1) Discloses complete effects of a transaction 2) Provides a chronological record of transactions 3) Helps prevent/locate errors b/c the debit & credit amounts can be easily compared

Adjusting Entries (3 things)

1) Ensures that revenue/expense recognition principles are followed 2) Necessary b/c trial balance may not contain current & complete data 3) Required every time a company prepares financial statements

How to post?

1) Post to debit account—date, journal pg #, amount 2) Enter debit account # in journal reference column 3) Post to credit account—date, journal pg #, amount 4) Enter credit account # in journal reference column

Steps in Preparing a Worksheet

1) Prepare trial balance on worksheet 2) enter adjustment data and adjusted balances 3) extend adjusted balances to appropriate statement columns 4) total statement columns, compute net income/loss

Independent Internal Verification (5 things)

1) records periodically verified by an employee who is independent 2) discrepancies reported to mgmnt 3) supervisors count cash receipts daily 4) treasurer compares total receipts to bank deposits daily and checks to invoices 5) reconcile bank statements

Retained Earnings

All of the incomes that stay inside the company, reinvested in company; decreased by expenses and dividends

Steps in Recording Process

Analyze each transaction, enter transaction in journal, transfer journal info to ledger accounts

COG Sold =

Beginning Inventory + Purchases - Ending Inventory

HR Controls

Bond employees, rotate employees' duties and require vacations, and conduct background checks

Estimated Cost of Ending inventory =

COG available for sale - net sales + estimated gross profit

Over-the-Counter Receipts

Important internal control principle—segregation of record-keeping from physical custody

sales revenue

In preparing closing entries, income summary account will be credited for the balance of ______.

Internal Control 4 things

Methods and measures adopted to: 1) Safeguard assets 2) Enhance accuracy & reliability of accounting records 3) Increase efficiency of operations 4) Ensure compliance w/ laws & regulations

Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances after journalizing & posting of closing entries

Dividend

a distribution of the company's earnings to its stockholders

Journalizing

act of entering transaction data into the journal

Accruals

adjust accrued revenues & accrued expenses

Deferrals

adjust prepaid expenses & unearned revenues

Temporary Accounts

are closed, include all revenue accounts, all expense accounts, & dividends

Current Assets

assets that a company expects to convert to cash or use up within 1 year or the operating cycle (whichever is longer)

Time Period Assumption

assumes that the economic life of a business is divided into artificial time periods

Journal

book of original entry where transactions are recorded in chronological order.

Documentation Procedures

companies should use pre-numbered documents & all documents should be accounted for; Use remittance advice (mail receipts), cash register tapes, and deposit slips, prenumbered checks, approved invoices,

General Ledger

contains the entire group of accounts maintained by a company

Establishment of Responsibility

control is most effective when only one person is responsible for a given task; only designated personnel are authorized to handle cash receipts (cashiers), sign checks

Cost of Goods (COG)

cost of goods sold is the total cost of merchandise sold during the period

Book Value

difference between the cost of any depreciable asset and its accumulated depreciation

Trial Balance

each account is analyzed to determine whether it's complete and current

First-In, First-Out (FIFO)

earliest goods purchased are first to be sold, often parallels actual physical flow of merchandise, & generally good business practice sells oldest units first; COG Sold = COG for sale - ending inventory

Petty Cash Fund

established to pay relatively small expenditures

Gross Profit Method

estimates the cost of ending inventory by applying a gross profit rate to net sales

Balance Sheet

financial statement that summarizes the financial position of a company

Closing Entries

formally recognize in the general ledger the transfer of net income/loss and dividends to retained earnings

Compensating balances are a restriction on the use of a company's cash and should be disclosed where?

in the financial statements

Monetary Unit Assumption

include in the records only transaction data that can be expressed in terms of money; The assumption that the unit of measure remains sufficiently constant over time

Cost Constraint

info is costly; weighing the cost that companies will incur to provide info against the benefit gained from the info

Lower-of-Cost-or-Market

inventory is reported as this in the financial statements, market defined as current replacement cost

Long-Term Investments

investments in stocks & bonds of other companies or in long-term assets (land or buildings) that a company is not currently using in its operating activities

Last-In, First-out (LIFO)

latest goods purchased are first to be sold, seldom coincides with actual physical flow of merchandise, & includes good stored in piles (coal or hay)

Expense Recognition Principles

match expenses with revenues in the period when the company tries to generate those revenues

Permanent Accounts

non closed, include all asset accounts, all liability accounts, & stockholders' equity

Cash Discount

not granted to retail customers

Long-Term Liabilities

obligations a company expects to pay after one year—mortgage, car loan, bonds payable, etc

Current Liabilities

obligations a company must pay w/in the coming year or operating cycle (longer one)

Worksheet

optional, multiple-column form used in preparing financial statements

FOB Destination

ownership passes to buyer once good is delivered and seller pays shipping

FOB Shipping Point

ownership passes to buyer once good is placed on truck; buyer pays for shipping

Bank Reconcilliation

prepared to explain any difference between the depositor's balance per books and the balance per bank

Posting

process of transfering amounts from journal to ledger accounts

Revenue Recognition Principles

recognize revenue in acct period in which it is earned—service revenue is "earned" when service is performed

Segregation of Duties

related duties should be assigned to different individuals; different individuals receive cash, record cash receipts, hold the cash, approve/make payments,

Materiality Constraints

relates to a financial statement item's impact on a company's overall financial condition and operations (material when size influences a decision)

Economic Entity Assumption

requires activities of entity be kept separate and distinct from the activities of its owner & all other economic entities

Cash Equivalents

short-term, highly liquid investments that are both readily convertible to cash and so near their maturity that their market value is relatively insensitive to interest rate changes

Fair Value Principle

states that assets and liabilities should be reported at their true value

Goodwill

the extra amount paid to make an acquisition

Depreciation

• Depreciation allocates a portion of the asset's cost as an expense during each period of the asset's useful life • Depreciation does not attempt to report the actual change in the value of the asset • Depreciation Expense has a normal debit balance & its counterpart is Accumulated Depreciation, a contra-asset account

Adjusted Trial Balance

• Prepared after all adjusting entries are journalized and posted • Purpose is to prove the equality of debit balances & credit balances in the ledger • The primary basis for the preparation of financial statements