Chapter #4 Flashcards
segregation of duty
different people for physical custody and record keeping of an asset
bank reconciliation
comparisons between a firm´s bank accounting records and bank statement provided by bank
identify reasons for differences
diiferent steps of bank reconciliation
make adjustments on banks statement for transactions on firm´s statement
make adjustments on firm´s statement for transactions on bank´s statement
what does a bank reconciliation enable a firm to do
detect errors
make adjustments to firm´s books for transactions the bank has recorded
adjustments that need to be made in the banks statement for bank reconciliation
deposits in transit are added to balance per bank
outstanding checks are deducted
errors made by bank may require additions or deductions
adjustments that need to be made in a firm´s statement for bank reconciliation
collections made by bank for the firm -> added to balance per books
service charges by the bank -> deducted from balance per books
customer´s non-sufficient-funds check -> deducted
interest earned on checking account ->added
errors made by firm -> adduction or deduction
what are a firms accounting records for reconciliation called
balance per books
what are a bank´s statements for reconciliation called
balance per bank
outstanding check
check that has been written but not cleared the bank, yet
cash equivalent
highly liquid investment
maturity of 3 months or less
firm can easily convert into a known amount of cash
what is accounts receivable
an current asset recorded when a sale is made on account
total amount customer owes to a firm
problem with accounts receivable
some amounts are uncollected and costly for the firm
net realizable value
amount of accounts receivable that company expects to collect
total - amount that is expected to be uncollectible
allowance method
method to estimate amount of uncollectible accounts
what are accounts receivable called that cannot be collected and what are theey recorded as
bad debts
bad debt expense (R/E)
allowance for uncollectible accounts (assets)
usind the allowance method there are 2 ways of estimating uncollectible accounts expense
percentage of sales method
accounts receivable method
on which financil statement does the percentage of sales method rely on
income statement and amount of current period´s credit sale that is unlikely to be collected
on which financial statement does the accounts receivable method rely on
balance sheet
what is an aging schedule in relation to the accounts receivable method
analysis of the amount owed to a firm by length of time they have been outstanding
what kind of expense is the bad debt expense on an income statement
operating expense
what is recorded on a balance sheet when a specific account is written off
decrease in accounts receivable (asset)
same increase in allowance for uncollectible accounts (asset)
no recording of bad debt expense
what happens if we record more bad debts than estimated
shortage in allowance for uncollectible accounts
what happens when we record fewer bad debts than estimated
extra in allowance for uncollectible accounts
why is the balance in allowance for uncollectible accounts and bad debts only in the 1st year equal
because of differences in estimated bad debts of previous year and accounts identified as uncollectible in following year
direct write off method
method in which bad debts are recorded in same period as identified as uncollectible
no estimates are made regarding bad debts
not considered GAAP
when is direct write off method used
only if firm has so few bad debts that accounts receivable are almost fully collected
how are bad debts recorded with the direct write off method
deduct directly from accounts receivable (assets)
as bad debt expense (R/E)
how does a retailer avoid the risk of extending credit to their customer
accepting credit cards
how do credit cards payment work
retailer submits credit card receipts to credit card company
amount retailer receives is not gross amount of sale
credit card company deducts % for service it provides
what is fee withheld by a credit card company classified as
operating expense
promissory note
same as notes receivable
written promise to pay specific amount at specific time
maker
maker or firm making promise to pay
responsible for note receivable
payee
person or firm receiving money
receiver of note receivable
difference between note receivable and accounts receivable
time and interest rate for notes receivable
formula for interest rate
interest = principal x rate x time
equation of current ratio
current assets/current liabilities
what does the accounts receivable turnover ratio tell
how quickly a firm collects its accounts receivable
equation for accounts receivable turnover ratio
net credit sales/averge net accounts receivable
what are key control to guard assets
segregation of duty
clear assignment of responsibilities
specific procedure for documentation
independent internal verification of data
