exam 2 Flashcards
- The SEC requires companies to file, on an annual basis, four financial statements:
Thebalancesheet
The income statement
The statement of changes in owners’ equity The statement of cash flows
fraud
Intentional misstatement of financial reports
rationalization
We are bold and entrepreneurial…that is how we do things here
opportunity
can occur when chief executive hires friends to important positions
incentive
it can increase executives job prospect
fraud triangle
presents the conditions under which fraud is most likely to occur.(rationalization, incentive, opportunity
demand deposit accounts(checking account)
funds deposited by the company with a financial institution
cash equivalents
Instruments that can be readily converted to a known amount of cash(CD and gov. securities)
certificate of deposit
short-term investment purchased through a bank or financial
institution.
Interest formula
Interest = principal x interest rate x time(Time is always in fractions of a year. 3/12, 1/4
spread
he difference between interest rates charged and interest rates paid
purchase of the CD
transaction has no effect on the income statement, no effect on the total Cash and Cash Equivalents reported on the balance sheet.
interest income
how interest is recorded; net income will be higher on income statement
interest receivable
asset indicates that SCE is entitled to receive that amount of interest in cash at a future date
merchandise inventory
Acquired inventory is inventory that a company can purchase and resell with minimal or no cost for additional processing
manufacturing inventory
inventory that is made by company
- Capitalizing
means those expenditures become part of the cost of the inventory, and thus part of the asset value reported on the balance sheet.(will be recognized as expense in the future as part of cost of goods sold.)
gross profit formula
revenue – COGS
Gross profit rate
gross profit divided by revenue, in percentage
FIFO
Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.
Cost of Goods Available for Sale (CoGAS)
Total cost of goods sold+Ending inventory balance
Lifo
costs of the latest goods purchased are the first to be recognized in determining cogs
In a period of price inflation
FIFO> Lifo net income lifo has tax advantage
If prices are falling
LIFO>fifo net income
average-cost produces
net income between FIFO and LIFO.
LIFO reserve.
the difference between inventory reported using LIFO and inventory as-if using FIFO
Average inventory
simple average of beginning and ending balances for the period covered by COGS.
inventory turnover ratio
COGS/average inventory
days in inventory
365/inventory turnover ratio
perpetual system
record inventory transactions in chronological order.
periodic inventory
COGS is recorded at the end of each period as an adjusting entry. * The order of purchases and sales does not matter.
Cost of goods available for sale formula
beg inventory +cost of goods purchased
end inventory+cost of goods sold
Under Periodic Inventory, COGS
cost of goods available for sale - ending inventory
conservatism principleCOGS using periodic inventory:
expenses and decreases in asset values are recognized immediately, but revenues and increases in asset values are delayed until they have occurred.
property, plant, and equipment (PP&E)
non-current asset that is held not to sell, but to facilitate the generation of revenue
tangible asset, meaning its value comes from its physical properties.
- Capitalizable expenditures for PP&E include
associated with acquiring or putting the PP&E into service:
Improvements
expenditures that improve the asset in a permanent way.(become part of assets accounting value)
Maintenance
expenditures are necessary to maintain the asset’s current standard of productivity and expected period of use.( recorded as expense immediately)
future benefit (improvements and maintenance)
improvements increase pp&e future benefit
maintenance prevents loss of future benefit
depreciation
allocation of PP&E depreciable cost to expense over the useful life of the asset.
annual depreciation expense formula
Historical cost
is the amount capitalized to acquire the asset
Depreciation expense
an operating expense reported on the income statement.
Accumulated depreciation
contra-asset account.It has a credit balance, which is opposite to (or contra) the debit balances that
assets normally have.
* It is paired with the related asset account
Depreciable cost formula
Acquisition cost – salvage value
Depreciable cost
is the total amount of depreciation expense that will be recognized over the useful life of the asset.
Salvage value
the amount the company expects to receive upon disposing of an asset it will no longer use.
straight-line depreciation formula
depreciable cost / useful life
= (acquisition cost – salvage value) / useful life
FASB
Accounting standards are developed
SEC
- Accounting standards are enforced
enforces that any public traded company must periodically file GAAP
Establishment of Responsibility
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.
documentation procedure
companies should use renumber documents and all document should be accounted for
employees should forward source documnets for accounting entries to the accounting department
segregation of duty
different individuals should be responsible for related activities
responsibility for record-keeping for an asset should be separate from the physical custody of that asset
Independent InternalVerification
records periodically verified by an employee who is independent
discrepancies reported to managment
human resource control
bond employees who handle cash
rotate employees duties and require vacations
conduct background checks
