ACG
cash payment control procedure
Require all payments be made by EFT or check, (exception small pymnts made from petty cash) Keep records of people who can sign checks
Pharming
Reroutes requests for legitimate websites to false websites
Computing Income from a service company
Revenues - expenses = Net income
FOB destination
Seller pays for the shipping cost
separate recordkeeping from custody of assets
a person who controls or has access to an asset must not keep that asset's accounting records
Reimburse and record expense in Petty cash
( all are examples) Debit: Miscellaneous expense Debit: Merchandise Inventory Debit: Delivery expense Debit Office expense Credit: cash
Falling Costs- LIFO
+ Reports the highest cost of goods sold- yielding the lowest gross profit and income. * Last Inventory purchased is sold first- using the price of merchandise purchased last to calculate the cost of merchandise sold first *Tax: LIFO results in the lowest income taxes (because of lower net income) during times of rising prices- IRS requires if this is used for tax reporting that it is also used for financial reporting
cash account
-includes cash on hand, checks on hand, and deposits in bank
Problem 5-7A (Static) Periodic: Alternative cost flows LO P1 Seminole Co. began the year with 23,000 units of product in its January 1 inventory costing $15 each. It made four purchases of its product during the year as follows. The company uses a periodic inventory system. On December 31, a physical count reveals that 40,000 units of its product remain in inventory. Mar. 730,000 units @ $18 each May 2539,000 units @ $20 each Aug. 123,000 units @ $25 each Nov. 1035,000 units @ $26 each Required:1. Compute the number and total cost of the units available for sale during the year. 2. Compute the amounts assigned to ending inventory and the cost of goods sold using (a) FIFO, (b) LIFO, and (c) weighted average.
1. Number and total cost of units available for sale: 23,000 units in beginning inventory @ $15= $345,000 30,000 units purchased @ $18=540,000 39,000 units purchased @ $20=780,000 23,000 units purchased @ $25= 575,000 35,000 units purchased @ $26= 910,000 150,000 units available for sale = $3,150,000 2. (a) FIFO periodic Total cost of 150,000 units available for sale = $3,150,000 Less ending inventory on a FIFO basis 35,000 units @ $26= $910,000 5,000 units @ $25 = 125,000 910,000 + 125,000 = 1,035,000 Cost of units sold $2,115,000 (b) LIFO periodic Total cost of 150,000 units available for sale $3,150,000 Less ending inventory on a LIFO basis 23,000 beginning inventory units @ $15= $345,000 17,000 units @ $18 = 306,000 345,000 + 306,000 = 651,000 Cost of units sold $2,499,000 (c) Weighted average periodic Total cost of 150,000 units available for sale= $3,150,000 Less ending inventory at weighted average ($3,150,000 / 150,000) × 40,000 = 840,000* Cost of units sold $2,310,000* *Amount can slightly vary due to differences in rounding.
Cash management strategies
1. Encourage early collection of receivables 2. Delay payment of Liabilities 3. Keep only necessary assets 4. Plan expenditures 5. Invest excess cash
COSO Control Activities (policies and procedures)
1. Selects and develops control activities to mitigate risks 2. Selects and develops information technology general controls 3. Deploys controls through policies and procedures
merchandiser
A business that sells merchandise, or goods, to customers.
debit memorandum
A decrease in a bank account.
deposit in transit
A deposit recorded by the company but not yet by its bank.
perpetual inventory system
A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand. - timely info to managers -gives immediate info on inventory -adjusting needed due to inventory shrinkage records cost of goods sold for each sales transaction
bank reconciliation
A report that accounts for the differences between the bank statement and a checkbook balance
Method Advantage (LIFO)
Cost of goods sold approximates its current cost: it also better matches current cost with revenue
bank reconciliation adjustment: Bank Balance adjustment
Add deposit in transit Subtract outstanding check add or subtract corrections of bank errors
bank reconciliation adjustment: Book Balance adjustment
Add interest earned and unrecorded cash receipts Subtract bank fees and NSF checks Add or subtract corrections of book errors
bank reconciliation: Book Statement recording
Add: Items already added to the bank balance, but not yet added to the book statement Deduct: Items already subtracted from the bank balance but not yet subtracted from the book balance
bank reconciliation: Bank Statement recording
Add: Items already added to the book balance, but not yet added to the bank statement Deduct: Items already subtracted from the book balance but not yet subtracted from the bank balance
Internal Control System
All policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.
Control of Cash
An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines
credit memorandum
An increase in a bank account- notifies the owner
periodic inventory system
An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period. -records goods in a purchase account
insure assets and bond key employees
Assets are adequately insured against casualty and that employees handling large amounts of cash and easily transferable assets are bonded
Merchandise Inventory
Balance sheet with current assets. Inventory includes cost to buy goods (to sell), shipping, and any other costs to get product ready to sale
Inventory Relation
Beginning Inventory + Net Purchases - Ending Inventory = Cost of Goods Sold
Inventory System
Beginning inventory + Net purchase = Merch avail for sale Ending inventory = cost of goods
Record Inventory Shrinkage
Beginning of the year: $13,600 Purchased: $42,200 Sold: $35,400 Year-end count: $14,600 1st: 42,200 + 13,600 - 35,400 -14,600= 5800 Record: Debit Cost of goods sold 5800 Credit Merch Inv. 5800 Assets (-) Equity (-)
Tax Effects
Both inventory and net income are higher when companies use FIFO in a period of inflation. LIFO results in the lowest income taxes (because of lower net income) during times of rising prices- IRS required if this is used for tax reporting that it is also used for financial reporting
commitee of sponsoring organizations
COSO Control Environment Risk assessment Control Activities Info and communications Monitoring
Over-the-Counter Cash Receipts
Cash register with locked-in record of transactions. Compare cash register record with cash reported. Custody over cash is separate from recordkeeping.
Merchandisers operating cycle
Cash to by product Product is Merch Inventory Credit sales Account Receivables Cash collection
cancelled checks
Checks that the bank has paid and deducted from the depositor's account.
COSO
Committee of Sponsoring Organizations of the Treadway Commission
Sarbanes-Oxley Act (SOX)
Companies whose stocks are traded on an exchange- public exchange: Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports. 25 years for not
Petty cash record
DEBIT: Petty cash Credit: cash
Goods Damaged or Obsolete
Damaged or obsolete goods are not reported in inventory if they cannot be sold. Damaged or obsolete goods which can be sold are included in inventory at net realizable value. Net realizable value = sales price minus selling costs. Loss is recorded when damage or obsolescence occurs. Damaged and obsolete (and deteriorated) goods are not reported in inventory if they cannot be sold. If these goods can be sold at a reduced price, they are included in inventory at net realizable value. Net realizable value is sales price minus the cost of making the sale. The period when damage or obsolescence (or deterioration) occurs is the period when the loss in value is reported.
Adjusting entries from bank reconciliation NSF checks
Debit : accts receivable name Credit cash
Payment within discount period (Buyer)
Debit Account payable (200) Credit Merchandise Inventory (discount 10.00) Credit Cash ( pymnt minus discount) (190) Asset (-190) Asset (- 10) Liability (-200)
Goods sold on credit terms
Debit Account receivable Credit Sales Assets (+) Equity (+)
Payment sent after discount period
Debit Accounts Payable Credit Cash Equity (- ) (-)
Record a discount due to payment during the discount timeframe ( 5/10 n60), record payment less discount ( Macys)
Debit Accounts payable ( original cost 1100- the return items 500 = 600) Credit Merch Inventory for discount ( 600 * .05= 30) Credit Cash for the amount after the return and discount ( 600 * .95= 570)
Sending a return to a Seller (Return to Macy's) jornal transaction
Debit Accounts payable for return amount Credit Merch Inventory for return amount
(SELLER) Sales with Cash Discount transaction ( get payment early)
Debit Accounts receivable (1000) Credit Sales (1000) Debit Cost of goods sold (300) Credit Merchandise Inventory (300) Assets (+ 1000), Equity (+ 1000) Assets ( - 300) Equity (-300)
Jornal FOB shipping point
Debit Merch Inventory for shipping cost Credit Cash for shipping cost (paid for freight , transportation out, freight out) Assets (+ ) (-)
Goods Purchased on credit
Debit Merchandise Inventory Credit Accounts Receivable Equity (+) Equity (+)
Purchase without a discount
Debit Merchandise Inventory Credit Cash Equity ( + ) and (-)
Purchase Returns (Buyer)
Debit Merchandise Inventory for full purchase amount ( 250 no discount) Credit Accounts Payable for full balance (250) Return Debit Accounts payable for return amount (50) Credit Merch Inventory for return amount (50) Discount for paying early Debit Accounts payable ( original cost 250- the return items 50 = 200) Credit Merch Inventory for discount ( 200 * .04= 4) Credit Cash for the amount after the return and discount ( 200 * .96= 196) Asset (+ 250, - 50, - 196, -4) = Liabilities ( +500, - 50, -200) + Equity
Merchandising company (Buying from Macy's) jornal transaction
Debit Merchandise Inventory for full purchase amount ( no discount) Credit Accounts Payable for full balance
Purchase with allowance (buyer)
Debit accounts payable Credit merchandise inventory Equity (-) (-)
IF a Merchant (Macys) doesn't pay within the discount timeframe then you would:
Debit accounts payable for full amount Credit Cash for full amount
If cash received is less than recorded cash sales
Debit cash Debit cash over or short Credit sales
If cash received is more than record cash
Debit cash Debit cash over or short Credit sales
Goods sold transaction
Debit cost of goods sold Credit merchandise inventory Assets (-) Equity (-)
Collection of Note
Debit: Cash Credit: Notes Receivable
Check Printing
Debit: Miscellaneous Credit: Cash
bank service charge
Debit: Miscellaneous Expense Credit: Cash
Increasing petty cash after reimbursement
Debit: Petty cash Credit : cash
Adjusting entries from bank reconciliation Bank fees
Debit: miscellaneous expense Credit cash
Buyer granted allowance ( seller gives a discount) Seller side
Discount given to customer to entice them to keep product Debit sales return and allowance Credit accounts receivable Asset (-) Equity (-)
invoice approval
Document containing a checklist of steps necessary for approving the recording and payment of an invoice; also called check authorization.
perpetual transaction recording
Each sales transaction for a merchandiser (cash or on credit) must have 2 entries. One for Revenue, One for cost * Revenue received ( asset increased) from customer * Cost of goods sold ( assets decreased) to the customer
COSO Monitoring
Evaluates effectiveness of ERM Program
net realizable value
Expected selling price (value) of an item minus the cost of making the sale.
Use the following information for the Quick Study below (Static) Trey Monson starts a merchandising business on December 1 and enters into the following three inventory purchases. Monson uses a periodic inventory system. Also, on December 15, Monson sells 15 units for $20 each. Purchases on December 710 units @ $ 6 cost Purchases on December 1420 units @ $12 cost Purchases on December 2115 units @ $14 cost Required:Determine the costs assigned to the December 31 ending inventory based on FIFO method
Explanation FIFO—Periodic (15 × $12) + (15 × $14) (10 × $6) + (5 × $12) Ending Inventory $390 Cost of Goods Sold $120
QS 5-25 (Algo) Analyzing inventory LO A3 Endor Company begins the year with $110,000 of goods in inventory. At year-end, the amount in inventory has increased to $130,000. Cost of goods sold for the year is $500,000. Compute Endor's inventory turnover and days' sales in inventory. Assume there are 365 days in the year.
Explanation Inventory turnover= Cost of goods sold / Average merchandise inventory = $500,000 / [($110,000 + $130,000) / 2] = 4.17 times Days' sales in inventory= Ending inventory / Costs of goods sold × 365 =($130,000 / $500,000) × 365 = 94.90 days
Use the following information for the Quick Study below (Static) [The following information applies to the questions displayed below.]Trey Monson starts a merchandising business on December 1 and enters into the following three inventory purchases. Monson uses a periodic inventory system. Also, on December 15, Monson sells 15 units for $20 each. Purchases on December 710 units @ $ 6 cost Purchases on December 1420 units @ $12 cost Purchases on December 2115 units @ $14 cost (Static) Periodic: Inventory costing with LIFO LO P1 Determine the costs assigned to ending inventory when costs are assigned based on the LIFO method.
Explanation LIFO—Periodic (10 × $6) + (20 × $12) ($300) (15 × $14) ($210) Ending Inventory $300 Cost of Goods Sold $210
Inventory costs LO C1 A car dealer acquires a used car for $8,000, with terms FOB shipping point. Compute total inventory costs assigned to the used car if additional costs include $190 for transportation-in. $120 for shipping insurance. $1,000 for car import duties. $180 for advertising. $1,400 for sales staff salaries. $160 for trimming shrubs. How many total units should Emma include in her company's period-end inventory?
Explanation The $180 advertising cost, the $1,400 cost for sales staff salaries, and the $160 trimming costs are included in operating expenses—they are not part of inventory costs. Those three costs are not necessary to get the vehicle in a place and condition for sale.
Use the following information for the Quick Study below (Static) Trey Monson starts a merchandising business on December 1 and enters into the following three inventory purchases. Monson uses a periodic inventory system. Also, on December 15, Monson sells 15 units for $20 each. Purchases on December 710 units @ $ 6 cost Purchases on December 1420 units @ $12 cost Purchases on December 2115 units @ $14 cost (Static) Periodic: Inventory costing with weighted average LO P1 Determine the costs assigned to ending inventory when costs are assigned based on the weighted average method. (Amounts to be deducted should be indicated with a minus sign. Round cost per units to 2 decimals.)
Explanation Weighted Average—Periodic ($510 / 45 = $11.33 cost per unit) (30 × $11.33) (15 × $11.33) Ending Inventory $339.90 Cost of Goods Sold $169.95
Identifying income tax effect of FIFO vs. LIFO LO A1 Blue Sky Co. is considering either FIFO or LIFO. Determine which method results in the lowest income tax expense in the current year when (a) inventory costs are rising and (b) when inventory costs are falling. The income tax rate is 22%, and is calculated as a percentage of net income.
Explanation a. LIFO When inventory costs are rising, LIFO results in higher cost of goods sold and lower net income. This results in a temporary tax advantage. b. FIFO When inventory costs are falling, FIFO results in higher cost of goods sold and lower net income. This results in a temporary tax advantage.
LIFO and FIFO TOGETHER 2
Explanation (a)FIFO (195 × $28.80) + (145 × $23.80)= ending inventory $9,067 (295 × $13.80) + (480 × $18.80) + (350 × $23.80) = cost of goods sold $21,425 (b)LIFO (295 × $13.80) + (45 × $18.80)= ending inventory $4,917 (195 × $28.80) + (495 × $23.80) + (435 × $18.80)= cost of goods sold $25,575 (c) FIFO Gross profit Sales revenue (1,125 units sold × $43.80 selling price)= $49,27 Less: FIFO cost of goods sold 21,425 Gross profit$27,850 LIFO Gross profit Sales revenue (1,125 units sold × $43.80 selling price)$49,275 Less: LIFO cost of goods sold 25,575 Gross profit $23,700
Fraud Triangle: Rationalization
Fraud perpetrators need to rationalize their action as acceptable (for example, I'm doing it for the good of the company).
divide responsibility for related transactions
Good internal control divides responsibility for a transaction or a series of related transactions between two or more individuals or departments so it can be checked
To record a check amount error
In the bank reconcililiation: Under book - add check info and debit the difference in amounts
Method Advantage (FIFO)
Inventory approximates its current cost: it also follows actual flow of goods for most businesses
Expense Recognition Principle
Inventory costs are expensed as cost of goods sold when inventory is sold. Dictates that the recognition of expenses is related to net changes in assets and earning revenues, that is, "let the expense follow the revenues."
LCM ( lower cost of market)
Is replacement cost for LIFO, but net realizable value for the other three (FIFO, Weighted, SI) A decline in market means a loss of value in inventory. When this happens it is documented. When market value increases there is no documentation. Debit: Cost of goods sold for difference ( was 11,00 now its 10,000 so 1000 is notes) Credit: Merchandise Inventory
cash receipts by mail
Keep a triplicate account and Preferably, two people are assigned the task of opening the mail; the cashier deposits the money in the bank; The recordkeeper records the amounts received in the accounting records;
QS 5-23 (Algo) Applying LCM to inventories LO P2 Ames Trading Co. has the following products in its ending inventory. Product 1. Mountain bikes 2.Skateboard 3.Gliders Quantity 1. 24 2. 10 3. 30 Cost per Unit 1. 700 2. 200 3. 730 Market per Unit 1. 650 2. 280 3. 670 Compute lower of cost or market for inventory applied separately to each product.
LCM applied to each market: is the lower amount between Cost and Market. EXAMPLE: Mountain bike is 16800 cost, and 15600 Market cost. Put 15600
Method Advantage (SI)
Matches the cost of items with the revenue they generate
Determining Inventory Items
Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Pay special attention to: Goods in transit, consignment, and damaged
Retail Inventory Method
Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail. 1. Goods available for retail sale - Net sales at retail = Ending Inventory at retail 2. Goods at available at sale cost / Goods available for sale at retail = cost to retail ratio 3. Ending Inventory at retail x Cost to retail ratio = Estimated ending inventory at cost
gross profit calculations
Net sales - Cost of goods = Gross profit
Computing Income from a merchandiser
Net sales- cost of goods = Gross profit Gross Profit - expenses = Net income
Principals of internal control
Principles prescribing management to establish responsibility, maintain records, insure assets, separate recordkeeping from custody of assets, divide responsibility for related transactions, apply technological controls, and perform reviews.
RECAP: Macy buys merchandise and has a return and gets discount:
Purchase Debit Merchandise Inventory for full purchase amount ( 1100 no discount) Credit Accounts Payable for full balance (1100) Return Debit Accounts payable for return amount (500) Credit Merch Inventory for return amount (500) Discount for paying early Debit Accounts payable ( original cost 1100- the return items 500 = 600) Credit Merch Inventory for discount ( 600 * .05= 30) Credit Cash for the amount after the return and discount ( 600 * .95= 570)
typo squatting
Redirecting a user to a fictitious website based on a misspelling of the URL. Also called URL hijacking.
Rising Cost- FIFO (first in, first out)
Reports the lowest cost of goods sold- yielding the highest gross profit and income. Method of using the fist bought to be first sold. The cost from the recent purchase are in the ending inventory
cash equivalents
Short-term (three months) , highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes. US treasury bill
Fraud Triangle: Opportunity
The ability of a person to take actions that perpetrate a fraud. ex. unrestricted access to all functions of an accounts payable system enables an employee to generate false vendor payments
Check Register
The book in which you keep records of checks, deposits, debit card transactions, and ATM withdrawals.
FOB shipping point
The buyer becomes responsible for the shipping cost of the goods they bought
Cost of Good Sold (COGS)
The cost of raw materials for operations, typically the second line of the income statement.
Physical Count Of Inventory
The counting of inventory used to verify the balance of inventory
consignor
The owner of goods being sent to consignment (consignee). The company still owns the merchandise so must include in inventory
Fraud Triangle
The three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization.
Buyer returns good to seller- Revenue side - Seller Side
This impacts Sellers Revenue and Cost. Debit Sale return and allowance ( a contra revenue account) Credit Cash Assets (-) Equity (-)
Buyer returns good to seller- Cost side- Seller side
To be resold Debit Merchandise Inventory Credit cost of good sold Asset (+) Equity (-)
Balance sheet: Ending Inventory understated / overstated
Understated / Overstated
Balance sheet: assets understated / overstated
Understated / Overstated
Balance sheet: equity understated / overstated
Understated / Overstated
apply technological controls
Use of technology to improve internal controls such as cash registers, check protectors, time clocks, and personal identification scanners.
Block Chain
Viewed as a new more secure tech - A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly
WI-phishing
WI networks set up by crooks in hopes you'll use it
falling costs
When cost regularly declines the reverse happens with FIFO, LIFO
Income statement: Cost of Goods sold understated / overstated
Year 1: Overstated/Understated Year 2 Understated / Overstated
Income statement: Ending Inventory understated / overstated
Year 1: Understated / Overstated Year 2: Overstated/Understate
Income statement: Net Income understated / overstated
Year 1: Understated / Overstated Year 2: Overstated/Understated
weighted average aka average cost
Yields results between FIFO and LIFO Requires that we use the AVG cost per unit of inventory at the end of the period.
retailer
a channel intermediary that sells mainly to consumers
receiving report
a document that records details about each delivery, including the date received, shipper, supplier, quantity received
purchase requisition
a form used to request the responsible person or department to purchase merchandise or other property
LIFO and FIFO TOGETHER Hemming Co. reported the following current-year purchases and sales for its only product. Date 1. Jan 1- Beginning Inventory: 295 units at 13.80 =4071 2. Jan 10 - sales: UNITS sold at retail: 240 @ 43.80 3. Mar.14- Purchase 480 units@ $18.80= 9,024 4. Mar.15 - Sales 420 units@ $43.80 5. July 30- Purchase 495 units@ $23.80= 11,781 6. Oct.5- Sales 465 units@ $43.80 7. Oct.26- Purchase 195 units@ $28.80= 5,616 Totals: 1,465 units acquired at cost= $30,492 1,125 units sold at retail Required:Hemming uses a periodic inventory system. (a) Determine the costs assigned to ending inventory and to cost of goods sold using FIFO. (b) Determine the costs assigned to ending inventory and to cost of goods sold using LIFO. (c) Compute the gross profit for each method.
also see LIFO and FIFO TOGETHER 2
COSO Risk Assessment
analyze, identify and manage risk factors
establish responsibility
assign each task to only one employee- incase of issues you'll know who to talk to
liquid assets
cash and items that can be quickly converted to cash ( reported fist on balance sheet) Less liquid reported last
cash equivalent types
coins, cash in checking, cash in safe
Liduidity
companies ability to pay for liabilities
COSO: Control Environment
company structure, ethics, and integrity for internal control
NSF check
debit accounts receivable, credit cash
Interest earned
debit cash, credit interest revenue
Adjusting entries from bank reconciliation Collection of note
debit: cash Credit note receivables
Decreasing Petty cash
debit: cash Credit: petty cash
Adjusting entries from bank reconciliation Interest earned
debit: cash credit: Interest Revenue
petty cash unexplained shortage
debit: miscellaneous expense Debit: cash over and short Credit: cash
COSO Control Activities
establishes policies, procedures and controls to reduce risk of loss
Days sales uncollected
estimated on how long it will take for acct receivables is recd in cash Accounts receivable/ Net sales x 365
Merchandise
goods that a business purchases to sell
maintain adequate records
helps protect assets and ensures that employees use prescribed procedures
wholesale
in large quantity; less than retail in price
Determining Inventory Costs
include all expenditures necessary to bring an item to a salable condition and location. Invoice cost minus any discount, plus any other cost including shipping, insurance. import duties, storage
Supplementary records
information outside the usual accounting records
Gross Profit /Gross margin
net sales less cost of goods sold
preform regular and independent reviews
preferably by outside auditors
Bank report
report of beginning and end balances/ transactions during stmnt period
COSO Info and communications
reports to internal and external parties
Method Advantage ( Weighted)
smoothes out erratic changes in cost
Bot networking
span and virus sent to your PC
Specific Identification
the inventory costing method that identifies the cost of the specific item that was sold common for custom made inventory.
