ACC 210 Test 3

Human Resource controls

-Bond employees who handle cash. -Rotate employees' duties and require vacations. -Conduct background checks.

Documentation procedures

-Companies should use pre-numbered documents, and all documents should be accounted for. -Employees should promptly forward source documents for accounting entries to the accounting department.

Accumulated depreciation

-Contra asset account (an asset account with a normal credit balance) that represents the total depreciation taken to date

Sales returns and allowances, and sales discount

-Contra-revenue account to sales revenue -debit increase

Establishment of Responsibilities

-Control is most effective when only one person is responsible for a given task. -Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel.

Segregation of duties

-Different individuals should be responsible for related activities -The responsibility for record-keeping for an asset should be separate from the physical custody of that asset.

Mail receipts

-Mail receipts should be opened by two people, a list prepared, and each check endorsed "For Deposit Only." -clerk signs the list -Original copy of the list, along with the checks, is sent to the cashier's department. -Copy of the list is sent to the accounting department for recording. Clerks also keep a copy.

Perpetual Inventory System

-Must maintain detailed records of the cost of each inventory item purchased -Records continuously show inventory that should be on hand for every item (that is, the Inventory general ledger account is updated for every purchase and sale of inventory that occurs) -Company recognizes cost of goods sold each time a sale occurs. -Made using cash or credit (on account) -Normally record when goods are received from the seller. -Purchase invoice should support each credit purchase.

return on assets

-Net income/average total assets or -Profit margin X asset turnover

Periodic Inventory System

-No need to keep detailed cost records of the individual inventory items on hand. -Cost of goods sold determined by counting remaining inventory at the end of the accounting period and solving for amount sold.

Two ways of acquiring intangible costs

-Purchase intangible costs (recorded at their original cost plus all other costs, such as legal and filing fees, necessary to get the asset ready for use) -Create intangible costs (most of the costs are expensed to the income statement as they are incurred; not capitalized)

Land and Land improvements Costs to Capitalize

-Purchase price -Closing costs such as fees for the attorney -Real estate agent commissions -Title and Title search -Recording fees -If the property is subject to back taxes or other obligations, we include these amounts as well. -Clearing, filling, and leveling the land, or even removing old buildings to prepare the land for its intended use -If we receive any cash from selling salvaged materials from old buildings torn down, we reduce the cost of land by that amount.

Independent Internal verification

-Records periodically verified by an employee who is independent. -Discrepancies reported to management.

Activity-based method

-This method calculates depreciation based on the use of the asset (e.g., operating hours, miles driven, or units produced) -It is commonly used by companies that depend heavily on natural resources depreciation rate per unit = depreciation cost (asset's cost-salvage value) / total units expected to be produced

Declining-balance method (Double declining balance method, DDM)

-an accelerated method -depreciation expense will decline over time -mostly used for tax reporting does not include salvage value depreciation expense = depreciation rate (2/service life) X book value

The Sarbanes-Oxley (SOX) act

-applies to publicly traded U.S companies -Required to maintain a system of internal control -Corporate executives and boards of directors must ensure that these controls are reliable and effective -Independent outside auditors must attest to the adequacy of the internal control system. -This act created the Public Company Accounting Oversight Board (PCAOB)

Straight-line method

-depreciation expense is equal each year -most common depreciation method used in financial accounting Depreciation expense = Asset's cost-salvage value/service life depreciation rate = 1/service life

Franchise Cost to Capitalize

-initial fee only -(Additional periodic payments usually expensed as incurred; not capitalized)

Trademarks Cost to Capitalize

-legal, registration, and design fees -(Advertising costs are recorded as advertising expense; not capitalized)

Asset turnover

-net sales/average total assets

Three factors that contribute to fraudulent activity

-opportunity -financial pressure -rationalization

Buildings Cost to Capitalize

-purchase price -commissions paid -architectural fees (for new construction) -remodeling/upfit costs

Equipment Cost to Capitalize

-purchase price -sales taxes -shipping and delivery fees -installation costs -delivery insurance -assembly -testing -legal fees incurred to establish title. (Any recurring costs related to equipment, such as annual property insurance, annual property taxes on vehicles, and normal maintenance costs, are expensed as they are incurred and NOT CAPITALIZED, in order to properly match them with revenues generated during the same period.)

Goodwill

-represents the value of a company as a whole, over and above the value of its identifiable net assets. It often is the largest, yet the most confusing, intangible asset recorded in the balance sheet. Cannot be separated from the company and sold individually like most long-term assets, even intangible ones. -Only recognized as an intangible asset on the balance sheet when one company buys another company -Recorded amount equals: purchase price - fair value of the net assets (A-L) acquired

three methods of asset disposal

-sale -retirement -exchange

sale

-the most likely -can result in either a gain or a loss

Days in inventory

365/Inventory turnover ratio

C. Use either of the two inventory systems

A Physical Count of Inventory is only required for companies that A. Use a periodic inventory system B. Use a perpetual inventory system C. Use either of the two inventory systems

None, it is not impaired

A building we own is being tested for impairment. The current book value = $300,000. The current fair value = $275,000. The estimated future cash flows = $320,000. What impairment loss should be recognized?

Debit: Depreciation expense = $300 Credit: Accumulated depreciation = $300

A local Starbucks pays $1,200 for equipment—say, an espresso machine—on January 1, 2016. The machine is expected to have a useful life of four years. The entry at 12/31/16 is

2016: $18,000 2017: $22,500

A machine is purchased on 1/1/16 for $100,000 and is expected to last six years and have a $10,000 salvage value. The machine is expected to operate for 100,000 hours and was run for 20,000 hours in 2016 and 25,000 hours in 2017. -Compute the depreciation expense using the activity-based method in both years

2016: $33,333 2017: $22,222

A machine is purchased on 1/1/16 for $100,000 and is expected to last six years and have a $10,000 salvage value. -Compute the depreciation expense using the double-declining balance method for both years

$15,000/yr each year

A machine is purchased on 1/1/16 for $100,000 and is expected to last six years and have a $10,000 salvage value. -Compute the depreciation expense using the single-line method

C. the depreciation expense will be the same in 2017

A machine is purchased on 1/1/16 for $500,000 and is expected to have a 4-year service life and no salvage value. In 2017, which depreciation method (straight-line or double-declining balance) will produce the higher amount of depreciation expense? A. Straight-line method B. Double declining-balance method C. The depreciation expense will be the same in 2017 D. Not enough information is provided

Physical Controls

Alarms, Garment sensors, safes, locks, security cameras, passwords, etc

amortizaition

Allocating the cost of intangible assets to expense -normal approach is straight-line, no salvage value (similar to depreciation for tangible assets, amortization is depreciation for intangible assets)

Cost of goods sold

An expense account that represents the cost of the inventory that is sold during the period. -also known as cost of sales, cost of merchandise sold, or cost of products sold =(Beginning Inventory + Purchases) - Ending Inventory

Tangible Assets

Assets in this category include land, land improvements, buildings, equipment, and natural resources

Intangible Assets

Assets in this category include patents, trademarks, copyrights, franchises, and goodwill. We distinguish these assets from property, plant, and equipment by their lack of physical substance. The evidence of their existence often is based on a legal contract.

Debit: Freight-out = $150 Credit: Cash = $150

Assume instead that the freight terms on the invoice in hand required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would be:

Debit: Inventory = $150 Credit: Cash = $150

Assume upon delivery of the goods on May 6, Sauk Stereo pays Public Freight Company $150 for freight charges, the entry on Sauk Stereo's books is:

$120,000

Calculate Year One depreciation for equipment bought for $300,000, with a 5-year useful life and a salvage value of $50,000 using DDB depreciation.

$160,000

Calculate Year One depreciation for equipment bought for $400,000, with a 5-year useful life and a salvage value of $50,000 using DDB depreciation

$200,000

Calculate Year One depreciation for equipment bought for $600,000, with a 6-year useful life and a salvage value of $60,000 using DDB depreciation.

manufacturing or merchandising companies

Companies that earn revenue by selling inventory

Inventory turnover ratio

Cost of goods sold/Average Inventory

Fraud

Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

It is impaired. Loss = $20,000

Equipment with a book value of $80,000 is forecasted to generate $70,000 of future cash flows over its remaining life. The current fair value is $60,000. Impaired? Loss to recognize?

it is not impaired

Equipment with a book value of $80,000 is forecasted to generate $90,000 of future cash flows over its remaining life. The current fair value is $70,000. Impaired? Loss to recognize?

B. We would include these goods in our inventory if they were shipped FOB shipping point

For goods we've acquired that are in transit at year-end A. We would include these goods in our inventory if they were shipped FOB destination B. We would include these goods in our inventory if they were shipped FOB shipping point C. We would include these goods in our inventory regardless of shipping terms

$470,000

GT Group begins the year with inventory of $50,000 and ends the year with inventory of $30,000. During the year, the company made four purchases equaling $450,000. Calculate GT's cost of goods sold for the year.

C. Companies record whenever they purchase another company and pay more than the estimated fair value of the acquired company's net assets.

Goodwill is the intangible asset that A. Companies record whenever they become more valuable (stock price increases). B. Companies record whenever they purchase another company. C. Companies record whenever they purchase another company and pay more than the estimated fair value of the acquired company's net assets.

Sales Revenue

Gross Profit + Cost of Goods Sold or Number of units sold X How much they were sold for

Net Income

Gross Profit - Operating expenses

Gross profit rate

Gross Profit/Net sales

A. Documentation procedures

Identify which control activity is violated: In order to save money on order slips and to reduce time spent keeping track of order slips, a local bar/restaurant does not buy pre-numbered order slips.

A. Segregation of Duties

Identify which control activity is violated: The person with primary responsibility for reconciling the bank account and making all bank deposits is also the company's accountant.

A. Human resource controls

Identify which control activity is violated: Wellstone Company's treasurer received an award for distinguished service because he had not taken a vacation in 30 years.

Cost of Goods sold is overstated and net income is understated

If beginning inventory is overstated and ending inventory is understated

Cost of Goods sold is understated and net income is overstated

If beginning inventory is understated and ending inventory is overstated

Over-the-Counter receipts

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

A. 2016 net income was overstated by $50,000

In 2016, PackCorp had an error in its ending inventory. It was overstated by $50,000. Ignoring taxes, which of the following is true. A. 2016 net income was overstated by $50,000. B. 2016 COGS was overstated by $50,000. C. 2017 net income will be unaffected by this error.

B. $525,000

In 2016, Wolfpack Corp. bought land and incurred these costs: purchase price, $500,000; real estate commission, $20,000; title fee, $5,000; 2016 property taxes, $2,000. How much should be capitalized in the Land account? A. $500,000 B. $525,000 C. $530,000 D. $527,000

B. Reported on the balance sheet as a current asset

Inventory still on hand at December 31 would be: A. Reported on the Income Statement for the year B. Reported on the Balance Sheet as a current asset C. Reported on the Statement of Retained Earnings for the year D. Reported on the Balance Sheet as a long-term asset

Weighted-average cost method

It assumes that both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale =Cost of goods available for sale/Number of units available for sale

Last-in, First-out (LIFO or FISH, First in still here)

It assumes that the last units purchased (the last in) are the first ones sold (the first out) -When prices are rising, the highest costs are reflected in COGS resulting in lower net income -Seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay. -Cost of goods sold reflects today's costs -Income-statement approach

First-in, First-out (FIFO or LISH, last in still here)

It assumes the first units purchased (the first in) are the first ones sold (the first out) -When prices are rising that means that COGS reflects lower costs and net income will be higher -Often parallels actual physical flow of merchandise -Companies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. -Ending inventory reflects today's costs -Balance-sheet approach

Multiple-step income statement

Key line items: -gross profit -Income from operations -Net income

Equipment

Machinery used in manufacturing, computers and other office equipment, vehicles, furniture and fixtures

purchase allowance

May choose to keep the merchandise if the seller will grant a reduction of the purchase price.

Internal control

Methods and measures adopted to: -Safeguard assets. -Enhance accuracy and reliability of accounting records. -Increase efficiency of operations. -Ensure compliance with laws and regulations.

Profit margin

Net income/Net sales

Sales made during the year less any returns, allowances and discounts taken by customers

Net sales revenue equals: A. Sales made during the year B. Sales made during the year less any returns C. Sales made during the year less any returns and allowances D. Sales made during the year less any returns, allowances and discounts taken by customers

Gross Profit

Net sales-Cost of Goods Sold

FOB shipping point

Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB destination

Ownership of the goods remains with the seller until the goods reach the buyer

Two-step impairment process

Step 1: Test for impairment: The long-term asset is impaired if future cash flows are less than book value. Step 2: If impaired, record impairment loss: The impairment loss is the amount by which book value exceeds fair value.

Residual value (salvage value)

This is the amount the company expects to receive from selling the asset at the end of its service life

Capitalize

To record any expenditure of cash as an Asset not an Expense. Assets are recorded at: cost of asset + all additional expenditures necessary to get the asset ready for use

$430,000

Tracy Company sells three different types of home heating stoves (gas, wood, and pellet). The cost and market value of its inventory of stoves are as follows. Cost Market Gas $84,000 $79,000 Wood $250,000 $280,000 Pellet $112,000 $101,000 Determine the value of the company's inventory under the lower-of-cost-or-market approach.

C. $250,000

We are awarded a Patent on a process we developed over the last three years, spending $2,000,000 in research and development. The legal and patent application fees were $250,000. How much is capitalized in the Patent account? A. $2,250,000 B. $2,000,000 C. $250,000 D. $-0

Loss on sale 5,000 Debit: Cash = 35,000 Debit: Accumulated depreciation 60,000 Debit: Loss on sale 5,000 Credit: Machine 100,000

We sell a machine today for $35,000 that we purchased exactly six years ago for $100,000. The machine has been depreciated straight-line over a 9-year life with a $10,000 salvage value. Gain or (Loss) =?

Patents and Copyrights Cost to Capitalize

When a firm purchases patents: -purchase price plus other costs such as legal and filing fees When a firm creates patents internally: -Any legal and filing fees incurred to secure the patent are capitalized -(expenses the research and development costs as it incurs them; not capitalized)

LIFO

When input prices (cost of purchased goods) are rising, which inventory valuation method will produce the highest Cost of Goods Sold?

FIFO

When input prices (cost of purchased goods) are rising, which inventory valuation method will produce the highest net income?

Double-declining balance method

Which depreciation method will typically produce the highest amount of depreciation expense in the first year of an assets life?

Building

administrative offices, retail stores, manufacturing facilities, and storage warehouses

Copyright

an exclusive right of protection given by the U.S. Copyright Office to the creator of a published work such as a song, film, painting, photograph, book, or computer software. Copyrights are protected by law and give the creator (and his or her heirs) the exclusive right to reproduce and sell the artistic or published work for the life of the creator plus 70 years.

Patent

an exclusive right to manufacture a product or to use a process. The U.S. Patent and Trademark Office grants this right for a period of 20 years.

Book value

cost-accumulated depreciation

Specific identification method

each individual inventory item is identifiable as to its cost (think cars or jewelry)

Land Improvements

include: parking lots, driveways, sidewalks, landscaping, lighting systems, fences, sprinklers, etc -Can depreciate

Trademark

is a word, slogan, or symbol that distinctively identifies a company, product, or service. The firm can register its trademark with the U.S. Patent and Trademark Office to protect it from use by others for a period of 10 years. The registration can be renewed for an indefinite number of 10-year periods, so a trademark is an example of an intangible asset whose useful life can be indefinite (can't be depreciated)

Land

land used for operations (factory sites, retail operations, corporate HQ) -Does not depreciate

Franchise

local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area

Impairment

occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value

LIFO conformity rule

requires companies that use LIFO for tax reporting to also use LIFO for financial reporting

service life

the time period over which the company expects to receive benefits from the asset before disposing of it.

retirement

when a long-term asset is no longer useful but cannot be sold

exchange

when two companies trade assets. In a trade, we often use cash to make up for any difference in fair value between the assets