Exam 3 Accounting
cash over and short
- cash deposited equals total cash register tape, when it doesn't the difference is recorded in ______ - debit balance represents "other expense" and credit balance represents "other revenue"
control environment
- collection of environmental factors that influence the effectiveness of control procedures - recognizes an individual employee's goals may differ from the goals of other individuals and goals of the business
petty cash
- fund may be used to pay for items such as stamps or a cake - using checks to pay small amounts more costly than paying cash
transactions recored by bank, not business
- service charge - non-sufficient funds (NSF) - debt memos - credit memos
outstanding check
-check issued and recored by business that has not been "cashed" by recipient of the check - cause bank balance to be higher than the business's cash account balance
- discounts - returns - allowances
3 changes to sales revenue
- bank reconciliation - cash over and short - petty cash funds
3 key cash controls
1. identify the contract with the customer 2. identify the performance obligations in the contract 3. determine the transaction price 4. allocate the transaction prices to the performance obligations in the contract 5. record revenue or sales when, or as, the entity satisfies the performance obligation
5 step model for revenue recognition
false
A balance sheet approach to estimating bad debt expense is not permitted under GAAP (generally accepted accounting principles).
false
A good system of internal control requires that the physical custody of assets be separated from the accounting for those assets. This concept is known as safeguarding of assets and records.
true
A primary advantage of the allowance method to account for bad debts is that it supports the matching principle.
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.
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
On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records.
Section 302 of SOX
Principal executive and financial officers must certify that they are responsible for establishing and maintaining the system of internal control over financial reporting
true
The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts receivable.
false
The lender of a note recognizes a note payable on the balance sheet and interest expense on its income statement.
true
The lender of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.
false
The sole purpose for creating an internal control system is to deter embezzlement.
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
Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.
forces management to be engaged with respect to its internal controls
What is the main purpose of Sarbanes Oxley Act sec. 404
true
When a bank pays interest on a company's checking account balance, the bank will likely issue a credit memo.
false
When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
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; reduces likelihood to conceal irregularities and increase likelihood to find irregularities
adequate documents and records
accounting records inside and outside of the business and summary records providing information for specific activities and help evaluate individual performance
net sales/ average net accounts receivable
accounts receivable turnover
gross method (sales return and allowances)
adjust when it happens
bank balance + deposits in transit - outstanding checks
adjusted bank balance
company balance + bank additions - bank deduction
adjusted company balance
cash equivalents
all highly liquid investments with an original maturity of 3 months or less at date of inception
deposit in transit
amount received and recorded by the businesses, but has not been recored by bank in time to appear on the current bank statement - cause bank balance to be smaller than the business's cash account balance
cash controls
authority to collect, hold, pay cash must be clearly assigned to specific individuals controlled designed record-keeping system and examined by objective party
clearly defined authority and responsibility
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
direct write-off method
bad debt expense is recognized when a specific account is deemed uncollectible
non-sufficient funds (NSF)
checks are checks that have been returned to the depositor because the funds in the issuer's account are not sufficient to pay the check (bounced check)
Internal Control System
consists of policies and procedures designed to make sure employees operate within the scope of their responsibilities and act for the good of the business
- clearly defined authority and responsibility - segregation of duties - adequate documents and records - safeguards over assets and records - checks on recorded amounts
control activities 5 categories
- transactions recorded by business, not by bank in time for bank statement - transactions recorded by the bank, not yet by business - errors in recording transactions on either set of records
difference between cash account balance and bank statement balance develop from 3 sources
yes
does everyone have a system for internal controls
- control environment - risk assessment - control activities - information and communication - monitoring
elements of internal controls
net method (sales returns and allowances)
estimate based on experience
service charges
fees charged by bank for checking account services - not recored until statement is received
buying inventory (good cash management keeps inventory levels low)
first stage of operating cycle
gross profit/ net sales
gross profit margin
- delay paying suppliers (company can earn as much interest on their cash as possible) - speeding up collection from customers (in order to invest the cash sooner) - earning the greatest return on an excess cash
how can a company manage its cash efficiently
errors
inevitable in accounting system and should be corrected immediately
information and communication
information must be communicated to appropriate employees in the organization
face value x rate x time
interest calculation
- operations are effective and efficient (operations objectives) - compliance with laws and regulations (compliance objectives) - financial reporting is reliable (reporting objectives)
internal controls establish to provide reasonable assurance that
operating margin
key ratio for financial analysts because it tells how much is left from a sales dollar after paying for the product and all its operations
allowance
late arrival, or any way that makes a product less valuable may be a reason for ______
gross method (sales transaction)
make assumption up front that the customer will not take discount
net method (sales transaction)
make the assumption up front that the customer will take the discount
allowance method
makes an estimate of uncollectible accounts at the end of each period
% of receivable and % of sales
methods for estimating bad debt
debt memos
might result if the bank makes a prearranged deduction from the business's account to pay a bill
true
money market accounts with the original maturities of less than 90 days are cash equivalents
net income/ net sales
net profit margin
accounts receivable - allowance for doubtful accounts (the amount we expect to receive in cash)
net realizable value formula
sales revenues - discounts, returns, allowances
net sales formula
accounting transactions
occur only when the fund is established and when it is replenished
false
on a bank reconciliation, outstanding checks are added to the cash balance per the bank statement
operating income/ net sales
operating margin
transactions recorded by business, not bank
outstanding check and deposit in transit
- balance sheet approach - aging analysis of A/R - different rates applied to different age categories - calculates the required final balance in the allowance account
percent of receivable
- income statement approach - credit sales (estimated bad debt %) - calculates the amount of bad debt expense to be recognized
percent of sales
start with "cash balance from bank statement" and "cash balance from company records" and produce identical adjusted cash balances
performing a bank reconciliation
safeguards over assets and records
physical protection of assets through fireproof vaults, locked storage facilities, keycard access, antitheft tags on merchandise also applies to computers
control activities
policies and procedures top management establishes to help ensure that its objective are met
risk assessment
procedures are designed to identify, analyze, and manage strategic risks and business process risks
monitoring
process of tracking potential/actual problems in the internal control system (supervising/internal audit)
accrual-basis accounting
recognizes revenue when a performance obligation or promise under a contract is satisfied (does not mean cash must be received)
checks and 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
one integrated system designed to meet the needs of a particular business
relationship between control activities and the accounting system
balance sheet
reports amount of cash and cash equivalents available at date
SOX Section 404 - statement of management's responsibility to establish and maintain internal controls - an assessment of the effectiveness of its internal controls
requires publicly traded companies to include in their annual report to stockholders an internal control report containing two items
credit memos
result if the bank collected a note receivable for the business
- purchase order - shipping documents - invoice - sale and it associated receivable recorded only when order, shipping, billing documents are all present
sales revenue, internal controls include the following documents and procedures
paying for inventory (delay payments as long as possible to earn more interest while keeping a good relationship with payee)
second stage of operating cycle
Committee of Sponsoring Organizations (COSO)
standard for understanding what good internal controls look like
2/10, n/30 2% discount if invoice paid within 10 days or total balance due in 30 days
standard notation to state discount and credit terms
false
the best response to an employee caught stealing from the company is to say "don't ever let me catch you doing that again!"
selling inventory (increase speed of receivable collections)
third state of operating cycle
Sarbanes Oxley Act
top management of publicly-traded corporations have an increased responsibility for a system of internal controls that ensures the reliability of the financial statements
- control function by identifying errors and providing an inspection of detailed records that deters theft - transaction detection function by identifying transactions performed by bank, so the business can make the necessary entries in its records
two purposes of bank reconciliation
bank reconciliation
use of a bank is one of the most important controls of cash; bank's accounting records and company's accounting records often disagree due to timing differences, these must be "reconciled" to ensure accounting records are consistent with bank's records
profitability ratios
used to try and measure the return the company is making on sales
- philosophy and operating style of management - personnel policies and practices of the business - overall integrity, attitude, awareness, actions of everyone in the business concerning the importance of control ("tone at the top")
what does control environment include
sales and receivables presented fairly according to GAAP
what is the end goal for internal controls for sales
- goods have been delivered - service has been performed
when do we earn revenue
false
when reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks
both balance sheet and statement of cash flow
where is cash reported