Chapter 7 Flashcards
What is internal control?
Internal control ensures efficient business operations, accurate records, timely financial statements, and asset protection.
How does the preparation of a bank reconciliation strengthen the internal control of cash?
A bank reconciliation compares the bank statement with the company’s records, updating and correcting errors, thus enhancing control over cash.
What are some reconciling items that appear in a bank reconciliation?
Reconciling items include book errors, NSF cheques, bank charges, outstanding deposits, outstanding cheques, and bank errors.
What are the steps in preparing a bank reconciliation?
Steps include comparing cancelled cheques, examining bank disbursements, comparing deposits, reviewing prior bank reconciliations, and correcting errors.
What is an NSF cheque?
An NSF (Not Sufficient Funds) cheque is one that cannot be cleared because the issuer’s bank balance is insufficient.
What is a petty cash system?
A petty cash system reimburses petty cash for the amounts disbursed when the fund is depleted.
What is the difference between establishing and replenishing the petty cash fund?
Establishing involves writing a cheque for the petty cash fund and recording it; replenishing involves writing a cheque to cover expenses and updating the ledger.
How does the use of allowance for doubtful accounts match expenses with revenue?
By estimating uncollectible amounts and recording them as expenses, bad debt expenses are matched with the revenues of the same period.
How does the income statement method calculate the estimated amount of uncollectible accounts?
This method applies a percentage of credit sales, based on historical data, to estimate bad debt expense.
What is an ageing schedule for bad debts, and how is it used in calculating the estimated amount of uncollectible accounts?
An ageing schedule analyzes receivables based on their age, applying loss percentages to estimate uncollectible amounts and adjusting the allowance account accordingly.
How are credit balances in accounts receivable reported on the financial statements?
Credit balances are usually transferred to liabilities, but if immaterial, they are netted against accounts receivable on the balance sheet.
