Chapter 6 - internal controls Flashcards
1
Q
What is the operating cycle?
A
- a series of activities that a company undertakes to generate revenue and cash.
2
Q
What is internal controls?
A
methods to protect against:
- theft of assets
- enhance the reliability of accounting info
- promote efficient/effective operations
- ensure compliance with laws and regulations
3
Q
What are the common control principles?
A
1) establish responsibility - assign task to only one employee
2) segregate duties - don’t make one employee responsible for all parts of a process
3) restrict access
4) document procedures
5) independently verify - check others work
4
Q
Define perpetual inventory.
A
- updates inventory records every time an item is bought, sold or returned.
5
Q
Define shrinkage.
A
- the cost of inventory lost to theft, fraud, or error.
- employee theft is number one cause
6
Q
What is FOB Shipping point?
A
- a term of sale indicating that goods are owned by the customer the moment they leave the sellers premise
- buyer pays for shipping costs
7
Q
What is FOB Destination point?
A
- a term of sale indicating that goods are owned by the seller until they are delivered to the customer.
- seller pays for shipping costs
8
Q
Define multi-step income statement.
A
- presents important subtotals, such as gross profit, to help distinguish core operating results from other less significant items that affect net income.
9
Q
What is Gross Profit?
A
- NET SALES - COGS
- a subtotal, not an account.
10
Q
What is Net Sales?
A
- NET SALES = SALES REVENUE - SALES D + A - SALES DISCOUNTS
11
Q
What is the gross profit percentage?
A
- NET SALES - COGS/NET SALES x 100
- profit earned on each dollar of sales, after considering COGS
- higher ratio = higher profit
12
Q
Define periodic inventory system
A
- inventory recorded at the end of accounting period.
13
Q
Define sales discount
A
- a sales price reduction given to customers for prompt payment
14
Q
Define sales returns and allowance
A
- refunds and price reductions given to customers after goods have been sold and found unsatisfactory
