Accounting Exam 3

freight out

seller is responsible for shipping costs

Outstanding checks

issued and recorded by the business but has not been cashed by the recipient of the check

purposes of reconciliation

it serves a control function by identifying errors and providing an inspection of detailed records It serves a transaction detection function by identifying transactions performed by the bank, so the business can make the necessary entries in its records

A check that has been distributed but has not cleared the bank as of the statement date is know as:

outstanding check

A check written by a company but not yet presented to the bank for payment is called

outstanding check

The December 31 Bank Statement shows the collection of $1,100 receivable from one of the company's customers. The company had not recorded this. How would you treat this while reconciling the company book balance?

Add $1,100 as collection of a receivable from one of the company's customers.

Cash Control

Bank Reconciliations Cash over and short Petty cash

What are the five categories of control activites?

Checks on recorded amounts Adequate Documents and Records Segregation of Duties Defined authority and responsibilities Safeguards of assets

Industry Forces (Porter's Force Five)

Competitors customers substitue products suppliers threat of new competitors

What are the three areas for which internal control systems are intended to provide reasonable assurance?

Effectiveness and effieciency Compliance with laws and regualations reliability of financial reporting

A good system of internal controls requires the physical custody of assets be separated from the accounting of the assets. Known as safe guarding of assets and records.

FALSE

An accounting system must be computerized in order to ensure the company has proper internal control.

FALSE

During Periods of declining purchase price, LIFO produces the lowest amount of ending inventory relative to the other inventory costing method.

FALSE

If a company has an internal audit function, it does not need to have external auditors.

FALSE

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

FALSE

If ending inventory is understated, then cost of goods sold is understated.

FALSE

No special internal control procedures are necessary with a petty cash fund bc the amount is so small

FALSE

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

FALSE

why do we have a reconciliation account?

In order to account for the time difference in-between with the deposit is sent and when the bank receives the check

Control Environment

Philosophy and operating style of management Personnel policies and practices of the business overall integrity, attitude, awareness, and actions of everyone in the business concerning importance of control

How are checks treated in the accounting system?

They are treated as currency - by debiting the cash account when a receipt is received.

What is the primary role of internal controls in managing business?

To constrain subordinates activities in order to prevent employees from deviating from the scope of their responsibilities and encouraging them to act in the best interest of the business.

Deposits in transits

amount received and recorded by the business, but which has not been recorded by the bank in time to appear on the current bank statement

freight in cost

buyer pays for shipping

Non-sufficient Funds Checks

check that has been returned to the depositor because the funds in the issuers account are not sufficient to pay the check

Compliance Objectives

compliance with applicable laws and regulations

An addition to the cash balance on the bank statement for items such as the collection of interest is known as:

credit memorandum

Cash equivalent are:

easily convertible into known amounts of cash close enough to maturity that they are relatively insensitive to changing interest rates

Operations Objectives

effectiveness and effciency of the entity's operations, including financial performance goals and safeguarding against loss.

Service Charges

fees charged by the bank for checking account services

debit and credit memos

if the bank makes prearranged deduction from the business's account to pay a utility bill

Macro factors (PEST)

political, economic, social, technological

Reporting Objectives

reliability of reporting. Includes internal and external financial and non-financial reporting

Checks written in late December do not appear on a December 31 Bank Statement because they were not cleared by the bank as of March 31. How would you treat this difference while reconciling the bank balance?

subtract them from the bank balance

the more liquid the asset

the more likely it is to stolen

What are the five components of internal controls?

Control environment risk assessment control activities information and communication Monitoring

On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement

FALSE

Sales discounts decrease the cost of inventory acquired.

FALSE

Under a perpetual inventory system, each time goods are purchased, the inventory account is transferred to sales revenue.

FALSE

When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.

FALSE

When the shipping terms are FOB destination, the buyer must record transportation costs as an addition cost of acquiring the inventory under the perpetual inventory system.

FALSE

the accountant must make journal entries for all items in the bank section of the bank reconciliation.

FALSE

Under the FIFO method of inventory costing, the units in the ending inventory represent the oldest purchases.

FALSE - LIFO

A company's internal control system must be designed and maintained by its external auditors.

FALSE.

As a part of a sound system of internal controls, all disbursements (with the exception of petty cash) should be made by check.

TRUE

Cost of goods sold is the difference between costs of goods available for sale and ending inventory.

TRUE

For a merchandising company, the cost of goods sold is subtracted from net sales to arrive at gross profit.

TRUE

Internal control over financial reporting is concerned with ensuring the reliability of the financial statements.

TRUE

The accountant must make journal entries for all items in the book section of the bank reconciliation.

TRUE

The buyer must include goods purchased FOB shipping point in its inventory account if the goods are still in transit

TRUE

The difference between the FIFO, LIFO, and average cost methods is that each of these methods of inventory costing makes a specific assumption about the flow of costs.

TRUE

The inventory turnover ratio is a measure of how many times during period a company sells off its inventory.

TRUE

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

TRUE

Under a periodic inventory system, the Purchases account accumulates the cost of the inventory acquired during the period.

TRUE

Under the periodic system, a physical inventory must be taken to determine the cost of goods sold.

TRUE

When merchandise is sold FOB destination, the seller is responsible for the shipping costs.

TRUE

With the perpetual inventory system, the inventory account is updated after each sale or purchase.

TRUE

FOB Shipping

ownership of inventory passes from the seller to the buyer at the shipping point.

FOB destination

ownership of the inventory passes when the goods are delivered to the buyer