ACCT Test 3

5 STEP MODEL FOR REVENUE RECOGNITION

-Identify the contract(s) with the customer -Identify the performance obligations in the contract -Determine the transaction price -Allocate the transaction prices to the performance obligations in the contract -Record revenue or sales when, or as, the entity satisfies the performance obligation

A Company's Control Environment includes the following

1) Philosophy and operating style of management 2) Personnel policies and practices of the business 3) Overall integrity, attitude, awareness, and actions of everyone in the business concerning the importance of control (i.e., tone at the top)

3 areas internal controls strives to meet

1. effectiveness and efficiency of operations 2. reliability of financial reporting 3. compliance with applicable laws and regulations

# of Days in Inventory

365 / Accounts Receivable Turnover Measures the average # of days A/R are on the books

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

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 produces periodic reports of sales and shipments.

Adequate documents and records

Invoices received from outside suppliers are filed with purchase orders.

Adequate documents and records

Adjusted Bank Balance

Bank Balance + Deposits in Transit - Outstanding Checks=

SAFEGUARDS OVER ASSETS AND RECORDS

Both assets and records must be secured against theft and destruction

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

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

Checks on recorded amounts

Internal Control Activities:

Clearly Defined Authority and Responsibility Segregation of Duties Adequate Documents and Records Safeguards over Assets and Records Checks on Recorded Amounts

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

Clearly defined authority and responsibility

Adjusted Company Balance

Company Balance + Bank Additions - Bank Deductions =

A balance sheet approach to estimating bad debt expense is not permitted under GAAP (generally accepted accounting principles).

False

As a result of the bank reconciliation process, a company will prepare an adjusting entry for a debit memo but not for a credit memo.

False

If a company estimates its bad debt expense on the basis of a receivables aging, the balance in the Allowance for Doubtful Accounts account will not affect the amount of the end-of-period adjusting entry for bad debts

False

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

False

If the bank debits its customer's checking account, then the customer's cash balance increases.

False

On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records.

False

Selling on credit protects a company from the risk that some of its receivables will never be collected.

False

gross profit margin

Gross Profit/Net Sales

Accounts Receivable Turnover

Net Sales / Average Net Accounts Receivable

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

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

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

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

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

buying inventory

The first stage of the operating cycle

paying for inventory

The second stage of the operating cycle is

selling inventory

Third stage, produces receivables

A primary advantage of the allowance method to account for bad debts is that it supports the matching principle.

True

Accounts receivable are shown on the balance sheet at their net realizable value.

True

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

If the bank credits a customer's account, then that customer's cash balance increases.

True

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

True

Money market accounts with original maturities of less than 90 days are cash equivalents.

True

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

True

The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.

True

The amount of interest paid is a function of three variables: the amount borrowed, the interest rate, and the length of the loan period.

True

The establishment of a petty cash fund has no effect on the company's total cash balance.

True

The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

True

The stronger the system of internal control, the higher the accuracy of the company's accounting records and financial reports.

True

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

True

outstanding check

a check issued and recorded by the business that has not been "cashed" by the recipient of the check

an example of a contra-asset is

allowance for bad debts

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

recorded amounts should be checked by an independent person to determine that amounts are correct and authorized

checks on recorded amounts

Division managers are evaluated annually on the basis of their division's profitability.

clearly defined authority and responsibility

if a company needs cash fast, they can

factor their receivables

Sales Allowances

given when customer returns good as unsatisfactory but agrees to keep the goods if the seller will make a price allowance.

what GAAP principal does the direct write off method break

matching principal

net profit margin

net income/net sales

accounts receivable-allowance for doubtful accounts=

net realizable value

operating margin

operating income/net sales

TRANSACTIONS RECORDED BY BUSINESS, NOT BANK

outstanding check deposit in transit

Internal Controls

policies and procedures established by top management and the board of directors to provide reasonable assurance that the company's objectives are being met

top management of publicly traded companies have an increased responsibility for a systems of internal controls

sarbanes oxley act

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

segregation of duties

accounting and cash collection should be properly separated

segregation of duties

TRANSACTIONS RECORDED BY BANK, NOT BUSINESS

service charges NSF checks debt memos credit memos

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

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

Sarbanes-Oxley Act of 2002

top management of publicly-traded corporations have an increased responsibility for a system of internal controls that ensures the reliability of the financial statements.

T/F: cash is recorded on both the balance sheet and statement of cash flows

true

T/F: direct write off is not GAAP compliant

true

T/F: the accounting system and internal control system are really one integrated system

true

T/F: the more liquid an asset is the more likely it is to be stolen

true